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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
PERSAKTIJIT DEY, J.M.
Aforesaid appeal by the assessee is against order dated 26 February 2016, passed by the learned Commissioner (Appeals)–59, Mumbai, for the assessment year 2012–13.
At the outset, learned Counsel appearing for the assessee submitted thatconsidering the smallness of the amount involved, on the instructions of his client, he does not want to press grounds no.4
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to 6. In view of the aforesaid submissions of the learned Counsel, grounds no.4 to 6 are dismissed.
Grounds no.6, 7 and 8, being general in nature, no separate adjudication is required.
In grounds no.1, 2 and 3, assessee has challenged the demand raised under section 201(1) and interest charged under section 201(1A) of the Income Tax Act, 1961 (for short “the Act”) alleging non–deduction of tax at source on borrowing fee paid through National Securities Clearing Corporation Ltd. (in short “NSCCL”).
Brief facts are,the assessee a company is stated to be engaged in the business of capital market broker and other activities related to securities business.To verify assessee’s compliance to the provisions relating to deduction of tax at source a survey under section 133A of the Act was carried out on the assessee on 22nd July 2011,. On the basis of discrepancies found relating to non–deduction of tax at source, the Assessing Officer initiated proceedings under section 201(1) of the Act. It was noticed that in the financial year 2011–12, the assessee, though, had debited an amount of ` 7,23,21,065 under the head finance cost, however, it has not deducted tax at source on such payment. When the assessee was called upon to explain the reasons for non–deduction of tax at source on such payments made, it
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was submitted that the said amount was paid to NSCCL under Securities Lending and Borrowing Scheme, 1997 (SLB) of Securities Exchange Board of India (SEBI) for enabling to settle short selling of securities. It was submitted, to participate in SLB scheme both lenders and borrowers are separately required to enter into agreement with an approved intermediary (AI) of SEBI. These agreements provide for period of depositing / lending of securities, charges or fee for depositing / lending, co-lateral securities for borrowing, provisions for pre–mature return of lent / borrowed securities, mechanism for resolution of dispute. It was submitted, there is no direct agreement between the borrower and lender of securities under the SLB scheme. It was submitted, NSCCL is an approved intermediary of SEBI and has acted as an intermediary for assessee’s transaction under SLB. Explaining the reason for non–deduction of tax at source, it was submitted by the assessee that the amount paid to NSCCL is not in the nature of income at its hands as NSCCL shows it as a liability in its books as they are to be paid to lending members. Further, since the identity of the persons to whom the amount is ultimately paid or credited is not known, TDS provisions cannot be applied. In this context, the assessee relied upon a decision of the Hon'ble Jurisdictional High Court in case of Industrial Development Bank of India v/s ITO, 293 ITR 267 (Bom). Without prejudice, it was also
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submitted that the borrowing fee paid not being in the nature of interest, the provisions of section 194A of the Act are not applicable. The Assessing Officer, however, did not find merit in the submissions of the assessee. He observed, NSCCL is neither exempt from provisions of TDS under section 197(1) of the Act nor under any express or special provisions of TDS by way of CBDT Circular or Notification. He observed, the nature of receipts in the hands of recipient is immaterial insofar as TDS provisions are concerned. The Assessing Officer observed, only in the event of issuance of no deduction certification under section 197(1) of the Act the payee can refrain from deducting tax at source while making payment. As regards assessee’s contention that identity of the persons to whom the amount is paid / credited is not known, the Assessing Officer observed that such contention is not acceptable, since, the assessee has paid the amount to NSCCL and the identity of the person to whom NSCCL would pay is not at all relevant. As regards assessee’s claim that the borrowing fee is not in the nature of interest, the Assessing Officer observed that since the payment made was on account of debt incurred in borrowing the securities for short selling in capital market, it will come within the definition of interest as provided under section 2(28A) of the Act. Thus, on the basis of aforesaid reasonings, the Assessing Officer held the assessee as an assessee in default and
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raised demand of ` 72,32,106 under section 201(1) of the Act and levied interest thereupon under section 201(1A) of the Act amounting to ` 22,41,952, aggregating to ` 94,74,058. Being aggrieved of the order passed under section 201(1) / 201(1A) of the Act, assessee preferred an appeal before the first appellate authority.
Before the learned Commissioner (Appeals) assessee contested the demand raised with elaborate submissions. The learned Commissioner (Appeals) after considering the submissions of the assesseeagreed that even though the borrowing fee was paid to NSCCL under the SLB scheme, however, status of NSCCL is just of a intermediary and facilitator for the transaction resulting in lending of shares and also that of an agent to ensure payment of lending fee to the lender. The learned Commissioner (Appeals) observed, the assessee is paying the borrowing fee to NSCCL which in turn is paid to the lenders. He observed, the assessee’s contention that the identity of the lenders are not known, hence, TDS provision is not workable cannot be accepted. He observed, since, the transactions are held through NSCCL it has full details of transactions and persons involved in such transactions. He observed, lending fee payable is ascertained the moment transaction is complete and the liability to pay the same arises immediately. Therefore, there is no uncertainty in respect of liability to pay the lending fee of the person to whom such payments
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have to be made.As regards assessee’s claim that the borrowing fee is not in the nature of interest, learned Commissioner (Appeals) rejected assessee’s claim on the reasoning that since the payment made by the assessee is towards a debt incurred, it is in the nature of interest as defined under section 2(28A) of the Act. Thus, he upheld the order passed by the Assessing Officer under section 201(1) / 201(1A) of the Act.
Shri Farrokh V. Irani, learned Sr. Counsel appearing for the assessee submittedthat for the purpose of borrowing securities, assessee has entered into an agreement with NSCCL which is the approved intermediary of the SEBI under the SLB scheme. He submitted, as per the SLB Scheme 1997, the transaction of lending and borrowing securities has to be carried out through approved intermediary. As per the terms of the Scheme, the lender shall enter into an agreement with the approved intermediary for depositing the securities for the purpose of lending. Similarly, the borrower shall also enter into an agreement with the approved intermediary for the purpose of borrowing security. The learned Sr. Counsel submitted, as per the terms of the scheme, there is no privity of contract between a lender and borrower as the SLB Scheme specifically prohibits such an agreement between the lender and the borrower for the lending or borrowing of securities. He submitted, since the lender and borrower
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have no privity of contract or even do not know each other, the borrowing fee is paid to NSCCL and the NSCCL in turn pays such fee to the respective lenders. He submitted, since, at the time of payment of the borrowing fee, the assessee, who is a borrower, is not aware of the identity of the lender, it is not possible on its part to deduct tax at source. He submitted, since NSCCL acts only as an intermediary and the custodian of the borrowing fee on behalf of the lenders of securities, the payment made to NSCCL cannot be regarded as income of NSCCL. He submitted, NSCCL has also clarified the aforesaid factual position by stating that the amount received as borrowing fee is shown as liability in its books of account. The learned Sr. Counsel drawing our attention to section 194A of the Act submitted that the provision requires the payment made to be in the nature of income in the hands of the recipient. Thus, as per the provisions of section 194A of the Act the borrowing cost paid by the assessee to NSCCL is not an income of NSCCL but income of the lenders. However, since the assessee is not aware of the identity of the recipient, it cannot deduct tax at source on such payment. Referring to the provisions of sub–section (3) of section 200 of the Act, the learned Sr. Counsel submitted that as per the said provision, the person deducting tax at source has to pay the TDS to the credit of the Central Government within the prescribed time and after making such payment shall furnish a statement in the prescribed
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manner before the prescribed authority setting forth the particulars of payment made and tax deducted at source. Referring to Form no.26Q which is the prescribed form for furnishing statement under section 200(3) of the Act, the learned Sr. Counsel submitted, the said format requires the assessee to furnish the name, address, PAN details of the payee / recipient. Further, referring to sub–section (1) of section 203 of the Act, the learned Sr. Counsel submitted, in the event of deduction of tax at source, the assessee has to issue a certificate of tax deducted to the payee / recipient of payment in the prescribed proforma. Drawing our attention to Form no.16A, provided under the Income Tax Rules, 1962, the learned Sr. Counsel submitted, in the said form the assessee has to mention the names, address and PAN details of the payee / recipient. He submitted, unless the assessee is aware of the identity of the payee / recipient of income along with other details such as names, address and PAN details, he cannot comply to the provisions of section 200(3) and section 203(1) of the Act. Thus, the TDS provisions will become unworkable in such a situation. The learned Sr. Counsel submitted that in such an event the assessee cannot be forced to do an impossible act. Thus, he submitted, in the aforesaid situation the provisions of section 194A of the Act cannot be applied to the payments made by the assessee to NSCCL. In support of such contentions, the learned Sr. Counsel relied
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upon the decision of the Hon'ble Delhi High Court in case of UCO Bank v/s Union Bank of India and Ors., judgment dated 11th November 2014, in W.P(C) no.3563 / 2012 and C.M. no.7517/2012. Without prejudice to the aforesaid submissions, the learned Sr. Counsel submitted that the borrowing cost paid by the assessee cannot be considered to be in the nature of interest as defined under section 2(28A) of the Act.
The learned Departmental Representative relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).
We have considered rival submissions and perused materials on record. First and foremost we have to deal with the primary and fundamental issue raised by the assessee on the point that in the absence of identity of the payee / recipient of income the assessee cannot deduct tax at source as the TDS provisions become unworkable. Before dealing with the aforesaid issue, it is necessary to deal with the nature of transaction leading to payment of borrowing fee by the assessee whichis the subject matter of the present appeal. The learned Commissioner (Appeals) in Para–4 and 4.1 of the impugned order has explained in detail the technicalities and nuances of the transaction of lending and borrowing of securities under the SLB
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Scheme. Therefore, there is no necessity to deal with them in detail in this order. To put it simply, SEBI has formulated the Securities Lending Scheme, 1997 for lending and borrowing of securities through an approved intermediary. As per the definition of Scheme, as provided under SLB Scheme 1997, it involves lending of securities through an approved intermediary to a borrower under an agreement for specified period with the condition that the borrower will return equivalent securities of the same type or class at the end of the specified period along with the corporate benefit accruing on the securities borrowed. As per clause (3)(1)(e) of the Scheme, lender means a person who deposits the securities registered in his name or in the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the Scheme. Borrower, as per clause 3(1)(c) of the Scheme means a person who borrows the securities under the Scheme through an approved intermediary. As per clause 3(1)(a) of the Scheme, approved intermediary means a person duly registered by the Board under the guidelines of the scheme through whom the lender will deposit the securities for lending and the borrower will borrow the securities. Clause 4(1) of the Scheme provides that both the lender and the borrower will separately enter into agreements with the approved intermediary for depositing the securities for the purpose of lending
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through approved intermediary and also for borrowing of securities through the approved intermediary. It further makes it clear that there shall be no direct agreement between the lender and borrower for the lending or borrowing of securities. Clause 4(2) of the Scheme provides that the beneficial interest arising out of lending the securities through approved intermediary along with corporate benefit shall accrue to the lender. Clause 4(4) of the Scheme clarifies that lending of securities under the Scheme through an approved intermediary shall not be treated as disposal of the securities. Of–course, the Scheme also provides for payment of fee for borrowing securities. Thus, a reading of the Scheme as a whole would indicate that the entire transaction relating to lending and borrowing of securities has to be mandatorily carried out through the approved intermediary.In the present case there is no dispute that the approved intermediary is NSCCL and lending and borrowing of securities for which the borrowing fee has been paid was carried out through NSCCL. The Assessing Officer has held the payment of borrowing fee to NSCCL to be taxable at the hands of NSCCL and accordingly raised the demand under section 201(1) and levied interest under section 201(1A) of the Act. However, the learned Commissioner (Appeals) has correctly appreciated the role of NSCCL while holding that it only acts as an intermediary or facilitator of the transaction of lending and borrowing securities and
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the borrowing fee is not an income of NSCCL. In fact, NSCCL has also clarified the aforesaid factual position by stating that the borrowing fee received by it is being shown as a liability in its books of account. Thus, to that extent, now it is settled that the borrowing fee paid by the assessee cannot be treated as income of NSCCL requiring the assessee to deduction tax at source under section 194A of the Act. However, the dispute does not end there. It is a fact on record, the ultimate beneficiary of the borrowing fee paid by the assessee is the lenders of the securities borrowed by the assessee through the approved intermediary. In other words, the borrowing fee paid by the assessee was ultimately received by the respective lenders of securities and NSCCL has only acted as a pass through entity. Thus, in effect, the borrowing fee paid by the assessee is to be treated as income of the lenders of securities borrowed by the assessee. The issue which arises for consideration before us is, whether the assessee can be held to be an assessee in default for not deducting tax at source under section 194A of the Act in respect of borrowing fee paid to the lenders through NSCCL. In this regard, it is the contention of the assessee from the very beginning that since the identity of the lenders are not known to the assessee it could not have deducted tax at source while making such payment. Thus, the TDS provisions become unworkable. However, though, the Assessing Officer has not
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at all dealt with the aforesaid contention of the assessee in depth, learned Commissioner (Appeals) has rejected the contention of the assessee by observing that all details relating to the lenders of securities and the respective transactions are available with NSCCL and, therefore, the assessee must also be aware of such informations relating to the lender of securities to whom the borrowing fee has ultimately been paid. On carefully scanning through the impugned order of the learned Commissioner (Appeals) we are unable to find any factual basis for the learned Commissioner (Appeals) to arrive at such a conclusion. As already discussed earlier, clause 4(1) of the Scheme mandates that the lender of securities and borrower of securities will have to enter into separate agreements with approved intermediary for lending and borrowing of securities. The Scheme specifically prohibits any direct agreement or contact between the lender and the borrower for lending and borrowing of securities. In fact, the code of conduct for approved intermediaries as per clause 11 of Annexure–C clearly states that the approved intermediary shall maintain confidentiality of information about lender or borrower which it has come to possess as a consequence of dealings with it and shall not divulge the same to other clients, the press or any other interested parties. Thus, on a reading of the Scheme as a whole, it appears that the lender and borrower of securities have no contact with each other
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as the entire transaction is regulated through NSCCL. Keeping in perspective the aforesaid facts, the contention of the assessee that, while making payment of borrowing fee it was not aware of the identity and other details of the lender, assumes importance. The learned Commissioner (Appeals) has not referred to any material to demonstrate that at the time of making payment to the NSCCL or prior to it the assessee knew the identity and other details of the lenders to whom NSCCL was ultimately going to pay the borrowing fee. It further appears, neither the Assessing Officer nor the learned Commissioner (Appeals) have conducted any enquiry with the NSCCL for ascertaining the fact as to whether at the time of making the borrowing fee or prior to it assessee was in knowledge of the identity and other details of the lender. Ascertainment of these facts is of utmost importance since from the very beginning it is the consistent stand of the assessee that it is not aware of the identity and other details of the lenders to whom the borrowing fee is ultimately paid by the NSCCL. The contention of the assessee that, in the absence of availability of the identity and other details of the lender to whom the borrowing fee is ultimately paid by the NSCCL the assessee could not have complied the provisions of section 200(3) and section 203(1) of the Act, has substantial force and cannot be brushed aside with some general observations. Since, the Departmental Authorities have not properly
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appreciated the contentions of the assessee and have not made any enquiry to ascertain the assessee’s claim that at the time of paying borrowing fee, it has no knowledge or information about the identity and other details of lenders, we are inclined to restore the issue to the file of the Assessing Officer for re–adjudication after proper enquiry. We make it clear, in the event it is ultimately found that at the time of paying the borrowing fee to NSCCL or even prior to it, the assessee was unaware of the identity and other details of the lenders, then it cannot be fastened with the liability of deduction of tax under section 194A of the Act, since, the TDS provisions will become unworkable and the assessee cannot be compelled to perform an impossible act. As regards the without prejudice submissions of the learned Sr. Counsel for the assessee that the borrowing fee is not in the nature of interest, since the decision on the aforesaid issue will depend upon the ultimate outcome of the issue relating to assessee’s claim that in the absence of identity of the payee could not have deducted tax at source, we refrain from deciding the issue at this stage and restore it to the Assessing Officer for deciding afresh, if warranted. Needless to mention, the Assessing Officer must afford a reasonable opportunity of being heard to the assessee. Grounds are allowed for statistical purposes.
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In the result, assessee’s appeal is partly allowed for statistical purposes. Order pronoun ced in the open Court on 23.05.2018
Sd/- Sd/- MANOJ KUMAR AGGARWAL SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 23.05.2018
Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary
(Dy./Asstt.Registrar) ITAT, Mumbai