The petitioner, Sanjay Baweja, was an ex-employee of Flipkart Internet Private Limited (FIPL), a wholly-owned subsidiary of Flipkart Marketplace Private Limited (FMPL). FMPL was a wholly-owned subsidiary of Flipkart Pvt. Ltd., Singapore (FPS). In 2012, FPS rolled out an Employee Stock Option Plan (ESOP) called Flipkart Stock Option Plan (FSOP).

The petitioner was granted 1,27,552 stock options from 01.11.2014 to 31.11.2016 with a vesting schedule of 4 years. On 23.12.2022, FPS announced the disinvestment of its wholly-owned subsidiary called PhonePe. Thereafter, the value of the stock options of FPS fell, and FPS decided to grant the option holders a payment of USD 43.67 per option as compensation towards the loss in the value of the options. It was also stated that the FPS would be withholding tax on the said compensation considering it as a perquisite under Section 17(2)(vi). The petitioner filed an application under Section 197 seeking a 'Nil' deduction certificate.

The Assessing Officer (AO) rejected the application, and the matter reached the Delhi High Court.

The High Court held that the amount in question cannot be considered as a perquisite under Section 17(2)(vi) as the stock options were not exercised by the petitioner, and the amount in question was a one-time voluntary payment made by FPS to all option holders in lieu of the disinvestment of PhonePe business.

The most crucial ingredient of the inclusive definition of perquisite is the determinable value of any specified security received by the employee by way of transfer/allotment, directly or indirectly, by the employer. As per Explanation (c) to Section 17(2)(vi), the value of specified security could only be calculated once the option is exercised. A literal understanding of the provision would provide that the value of specified securities or sweat equity shares is dependent upon the exercise of option by the petitioner. Therefore, for an income to be included in the inclusive definition of "perquisite", it is essential that it is generated from the exercise of options, by the employee.

In this case, the petitioner had merely held the stock options without exercising them, so they do not constitute taxable income for the petitioner since none of the contingencies specified in Section 17(2)(vi) have occurred.