S vs. COMMODITY BROKERS P.LTD,MUMBAIVS.ADDL CIT (TTDS) RG 3, MUMBAI

This appeal has been filed by the assessee against the order passed by the Commissioner of Income-tax (Appeals)14, Mumbai [hereinafter called CIT(A)] dated 08-10-2014 passed against penalty order of the AO u/s 271C of the Act date 22-02-2013 for A.Y. 2008-09 on the following grounds:-

The Learned Commissioner of Income Tax (A) erred In appreciating the fact that there were conflicting judgements in respect of deductibility of TDS on transaction charges to BSE and NSE.” 2. The brief facts and background of this case are that the assessee is a stock broking company and had paid during the year, transaction charges of Rs.11,84,390.43 to the Stock Exchange. The AO found that the assessee failed to deduct TDS on this amount and accordingly a show-cause notice was issued by the AO for levying penalty u/s 271C of the Act. In reply, the assessee submitted vide letter dated 28-9-2012 that assessee was not sure whether TDS on the impugned amount was liable to be deducted in view of the judgements available on both the sides. However, the AO did not accept the submission of the assessee on the ground that transaction charges paid by the assessee were in the nature of fee for technical services rendered by Stock Exchange to the assessee, as per section 9(1)(vii) of the Act as held by Hon’ble Bombay High Court in the case of CIT vs Kotak Securities Ltd 15 Taxmann.com 77. Therefore, the assessee should have deducted TDS upon the same and since the assessee did not deduct tax at source on the transaction charges paid without any reasonable cause, the AO held that it was a fit case for levy of penalty, thus, penalty of Rs.1,18,439 was levied u/s 271C. In first appeal, Ld. CIT(A) dismissed the appeal of the assessee exparte and held that the AO had rightly levied the penalty.

During the course of hearing before us, the Ld. Counsel Hon’ble Supreme Court in the case of M/s Kotak Securities Ltd in Civil Appeal No. 3141 of 2016 dated 29-03-2016 and submitted that this issue now stands covered by the aforesaid judgement wherein it was held that the services rendered by the Stock Exchange were not in the nature of technical services as envisaged in section 9(1)(vii) of the Act.

Under these circumstances, the first issue that we need to decide is whether the amount paid by the assessee to the stock exchange was for technical services as envisaged in section 194J r.ws.s. 9(1)(vii) or not. In this regard it is noted by us that this issue is no more res integra since precisely, this issue has been decided by the Hon’ble Supreme Court in the case of Kotak Securities Ltd (supra). We find it By the impugned order dated 21st October, “3. 2011 passed in the aforesaid appeal, the High Court of Bombay has held that the transaction charges paid by a member of the Bombay Stock Exchange to transact business of sale and purchase of shares amounts to payment of a fee for 'technical services' rendered by the Bombay Stock Exchange. Therefore, under the provisions of Section 194J of the Income Tax Act,1961 (for short "the Act"), on such payments TDS was deductible at source. The said deductions not having been made by the appellant - assessee, the entire amount paid to the Bombay Stock Exchange on account of transaction charges was not deducted in computing the income chargeable under the head "profits and gains of business or profession" of the appellant - assessee for the Assessment Year in question i.e.2005-2006. This is on account of the provisions of Section 40 (a)(ia) of the Act. Notwithstanding the above, the Bombay High Court held that in view of the apparent understanding of both the assessee and the Revenue with regard to the liability to deduct TDS on transaction charges paid to the Bombay Stock Exchange right from the year 1995 i.e. coming into effect of Section 194J till the Assessment Year in question, benefit, in the facts of the case, should be granted to the appellant - assessee and the disallowance made by the Assessing Officer under Section 40 (a)(ia) of the Act must be held to be not correct.

Aggrieved by the finding that transaction charges paid to the Stock Exchange are fees for "technical services", the assessee - Kotak Securities Ltd. is in appeal before us whereas the Revenue seeks to challenge the later part of the order of the High Court set out above. The assessee is also in appeal against similar orders passed in respect of subsequent assessment orders in the case of the assessee itself. As the order of the High Court, with regard to transaction charges being in the nature of fee for technical services, has been made applicable to the assessments in case of other assessees, such of the assessees who are aggrieved thereby have filed the other appeals before us.

The relevant provisions of the Act which have a material bearing to the issues arising for determination in the present appeals may now be noticed. Section 194J; Section 40 9(a)(ia) of the Act introduced by Finance (No.2) Act, 2004 with effect from 1st April, 2005; and Explanation 2 of Section 9(1)(vii) which are relevant for the purpose of the present case reads as under: 194J. Fees Jar professional or technical services. (1) Any person, not being an individual or a Hindu Undivided family, who is responsible for paying to a resident any sum by way of- (a) fees for professional services, or (b) fees for technical services or (c) royalty, or (d) any sum referred to in clause (va) of section 28 shall at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent of such sum as income-tax on income comprised therein: Explanation.-For the purposes of this section,- (a) …………… (b) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; 40. Amounts not deductible. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession" (a) in the case of any assessee- (i) . ……………. (ia) any interest, commission or brokerage, rent,royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200: Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted in the previous year but paid in anysubsequent year after the expiry of the time prescribed under sub-section (1) of section 200 such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Explanation. - ………..

A reading of the very elaborate order of the Assessing Officer containing a lengthy discourse on the services made available by the Stock Exchange would go to show that apart from facilities of a faceless screen based transaction, a constant upgradation of the services made available and surveillance of the essential parameters connected with the trade including those of a particular/single transaction that would lead credence to its authenticity is provided for by the Stock Exchange. All such services, fully automated, are available to all members of the stock exchange in respect of every transaction that is entered into. There is Stock Exchange. "Technical services" like "Managerial and Consultancy service" would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter,even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance / service. It is only service of the above kind that, according to us, should come within the ambit of the expression "technical services" appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act.

There is yet another aspect of the matter which, in our considered view, would require a specific notice. The service made available by the Bombay Stock Exchange [BSE Online Trading (BOLT) System) for which the charges in question had been paid by the appellant - assessee are common services that every member of the Stock Exchange is necessarily required to avail of to carry out trading in securities in the Stock Exchange. The view taken by the High Court that a member of the Stock Exchange has an option of trading through an alternative mode is not correct. A member who wants to conduct his daily business in the Stock Exchange has no option but to avail of such services. Each and every transaction by a member involves the use of the services provided Stock Exchange for which a member is compulsorily required to pay an additional charge (based on the transaction value) over and above the charges for the membership in the Stock Exchange. The above features of the services provided by the Stock Exchange would make the same a kind of a facility provided by the Stock Exchange for transacting business rather than a technical service provided to one or a section of the members of the Stock Exchange to deal with special situations faced by such a member(s) or the special needs of such member(s) in the conduct of business in the Stock Exchange. In other words, there is no exclusivity to the services rendered by the Stock Exchange and each and every member has to necessarily avail of such services in the normal course of trading in securities in the Stock Exchange. Such services, therefore, would undoubtedly be appropriate to be termed as facilities provided by the Stock Exchange on payment and does not amount to "technical services" provided by the Stock Exchange, not being services specifically sought for by the user or the consumer. It is the aforesaid latter feature of a service rendered which is the essential hallmark of the expression "technical services" as appearing in Explanation 2 to Section 9 ( 1) (vii) of the Act.

For the aforesaid reasons, we hold that the view taken by the Bombay High court that the transaction charges paid to the Bombay Stock Exchange by its members are for 'technical services' rendered is not an appropriate view. Such charges, really, are in the nature of payments made for facilities provided by the Stock Exchange. No TDS on such payments would, therefore, be deductible under Section 194J of the Act.”

From the perusal of the above, it is clear that Hon’ble Supreme Court has held that the service provided by the Stock Exchange to the assessee company would not fall 9(1)(vii) of the Act, since service would be merely in the nature of facility offered or available which would not be covered by the aforesaid provision of the Act. Under these circumstances, it was held that no TDS on such payment would therefore be made u/ s 194J of the Act.