fiogf49gjkf0d
INTRODUCTION
1. Section 194J, in substance, requires every
person [with some exceptions] responsible for paying [Payer] to a resident
[Payee] to deduct tax at source [TDS] from payment of any sum by way of `fees
for professional services’, `fees for technical services’, etc,. at the time of
payment or credit of such sum to the account of the Payee as provided in Sec.
194 J (1) at the specified rate. There are some exceptions/ relaxations from
this requirement with which we are not concerned in this write-up. For the sake
of convenience, reference to TDS requirement at the time of credit is ignored.
1.1 For the above purpose, ‘fees for technical services’ [FTS], has the same
meaning as given in Explanation 2 to section 9 (1)(vii) [said Explanation].
This Explanation effectively defines FTS as consideration paid for rendering of
any managerial, technical or consultancy service. This definition has some
further inclusions and exclusions with which we are not concerned in this
write-up. As such, TDS requirement is required to be complied with while making
payment of FTS by the Payer as provided in section 194J (1). There is also
corresponding provision contained in section 40 (a)(ia), which provides for
disallowance of expenditure incurred by way of FTS in the event of TDS default
u/s. 194J, wherein also some relaxations are provided with which we are not
concerned in this write-up. Section 194J is also amended to cover payments of
`royalty’ within it’s scope by the Taxation Laws (Amendment) Act, 2006 [w.e.f. 13/07/2006]
with which also we are not concerned in this write-up.
1.2 For the above purpose, in the context of payments for different types of
expenses , meaning of the expression FTS under the said Explanation has come-up
for interpretation before the courts/tribunal from time to time.
1.3 The Madras High Court, in the case of Skycell Communications Ltd.
(Skycell’s case) reported in 251 ITR 53 had an occasion to consider meaning of
the expression FTS in the context of payment for availing cellular telephone
services wherein, the Court has taken a view that such payment is made in order
to have the facility of communication with others and in such cases, the Payer
does not contract to receive the technical services [TS]. He agrees to pay for
the use of air time. This judgment also supports the view that mere collection
of a fee for the use of standard facility available for all those willing to
pay for it does not amount to FTS. The fact that the service provider has
installed sophisticated technical equipment in the exchange to ensure
connectivity to its subscriber, does not on that score, make it a provision for
TS. Whatever applies to cellular mobile phone services, also applies to fixed
line telephone services. Neither service can be regarded as TS for the purpose
of Sec. 194J. Similarly, the internet is very much a product of technology
which cannot be provided without installation of sophisticated equipments and
cannot be used by the subscribers without the use of telephone mobile or fixed
lines. On that score, every subscriber of internet service provider cannot be
regarded as having entered into contract for availing TS . According to the
High Court, the provisions of the Act must be construed in the background of
the realities of day to day life in which the products of technology play an
important role in making life smoother and more convenient. In fact, the Court
also found the view of the Revenue applying TDS requirement to subscribers of
telephone as grossly unreasonable. This view of the Madras High Court has been
followed in other cases by the courts/ benches of tribunal. As such, the
general view which emerged was that if a standard facility is provided through
usage of machine or technology, it should not be termed as rendering of TS and
the payments for the same should not be regarded as FTS for the purpose of TDS
u/s. 194 J .
1.4 Further, in the context of payments made to MTNL/BSNL by the companies
engaged in the business of providing cellular telephone services to their
subscribers for providing use of facilities for interconnection between the two
networks at inter connection points known as ports, the Delhi High Court in the
case of Bharti Cellular Ltd and connected appeals [319 ITR 139] took the view
that, the expression TS used in the definition of FTS was not be construed in
the abstract and general sense but in the narrower sense as it is circumscribed
by the expressions ‘managerial service’ and ‘consultancy service’ in the
definition of FTS which have a definite human element attached to them. As
such, according to the Court, the expression TS would have reference to only
technical service rendered by human, it would not include any service provided
by machines or robots. Therefore, according to the Court, payment of
interconnection charges/port access charges could not be regarded as FTS. With
this judgment, in this context, the view started getting acceptance that for
the purpose of rendering TS, the presence of human intervention is crucial and
therefore, as long as there is no human intervention in a service, it cannot be
treated as TS as contemplated in the definition of FTS given in the said
Explanation. This view is also followed in other cases. The issue with regard
to this requirement of presence of human intervention in the provision of TS
got largely settled with the judgment of the Apex Court in the case of Bharti
Cellular Ltd. and other cases [390 ITR 239]. In this case, the Court dealt with
the judgment of the Delhi High Court in the case of Bharti Cellular Ltd
[supra]. In these cases, the Apex Court remitted back the matters to the
Assessing Officers [AO] with the direction that in each case, the AO should
examine a technical expert from the side of the department and to decide,
whether any human intervention was involved in the provision of interconnection
services. In this judgment, the Apex Court also gave certain directions to CBDT
to issue directions to the AOs to examine and bring necessary technical
evidences on record in such cases before deciding the issue and not to proceed
only on the basis of contracts placed before them. From this judgment of the
Apex Court, it would appear that the principle laid down by the Delhi High
Court, in restricting the scope of the expression TS that it should necessarily
involve human intervention, got effectively approved. This view is also
followed in other cases by the Tribunal. Accordingly, the view emerged is that
the element of human intervention, interface or application of human mind or
direct or indirect involvement of human endeavor is necessary for any service
to be regarded as the provision of TS within the definition of the FTS. As
such, what constitutes technical service essentially becomes a question of fact
to be examined in each case. Therefore, to an extent, uncertainty remains in
dealing with this issue.
1.4.1 Subsequently, the CBDT issued Instruction No. 5/2011 dtd 30th March, 2011
in which, by referring to the judgment of the Apex Court in the case of Bharti
Cellular Ltd [supra], directing the AOs. / Transfer Pricing Officers that they
should frame assessments only after bringing on record appropriate technical
evidence that may be required in a case for this purpose and should not proceed
only by the contracts between the parties.
1.4.2 With the above position, with regard to the requirement of human
intervention for providing TS as contemplated in the definition of FTS, further
issue with regard to degree of human involvement became relevant for
consideration. In this context, the issue really faced is whether presence of
incidental/ insignificant human involvement or interface could make an
arrangement provision of TS.As such, in this context, a debate started that is
it a question of more or less of human involvement or is it a question of
presence or absence of human involvement. Generally, in this context, it was
believed that the incidental / insignificant human involvement should not make
the service as TS within the definition of FTS. This view gets support from the
decisions of the Tribunal. However, the Agra bench of the Tribunal in the case
of Metro and Metro [(2014) 29 ITR (trib) 772] took a different view that the
question is not of extent of human involvement but it is the question of either
presence or absence of human involvement. The correctness of this view is
seriously doubted in the profession. But this decision kept this further issue
alive.
1.5 In the context of the meaning of the expression TS in the definition of
expression FTS, the issue was also under debate as to whether the transaction charges
paid to Stock Exchange by its members to transact the business of trading in
securities could be regarded as FTS. This issue was decided by the Bombay High
Court against the assessee in the case of Kotak Securities Ltd [340 ITR 333].
However, the action of the AO in disallowing this expenditure u/s. 40(a)(ia)
was not upheld by the High Court for the reasons stated in the judgment.
1.6 The issue referred to in para 1.5 as to whether payment of such transaction
charges would constitute FTS for the purpose of TDS u/s. 194J and consequent
effect of section 40(a)(ia) for the assessment year in question, dealt with by
the Bombay High Court in the case referred to in the para 1.5 above, recently
came-up for consideration before the Apex Court and has now got resolved.
Considering the importance of this judgment and the other implications thereof,
it is thought fit to analyse the same in this column.
CIT vs. Kotak Securities
Ltd .- 340 ITR 333 (Bom)
2. In the above case, the relevant brief facts were: The assessee company was
engaged in the business of share broking, depositories, etc. The trading in
securities were carried out through recognized Stock Exchanges such as Bombay
Stock Exchange (BSE), National Stock Exchange of India (NSE), etc. The Stock Exchanges
regulate members’ activities like entering into, making, performance and
termination of contracts including contracts between members or between a
member and its constituents or between a member and a person, who is not a
member and the consequences of default, etc. For the purpose of facilitating
such trading activities, the BSE had devised the BSE On-Line Trading (BOLT )
system. Similar system is also devised by the NSE. For the purpose of
convenience, the Court decided to deal with BOLT system devised by the BSE.
This system provides for totally automated screen- based trading in securities
and facilitates the member- brokers to trade in securities from the trade
workstation installed in their offices which has replaced the earlier system of
assembling in the trading ring for carrying out this activity. The BOLT system
provides all the data that is necessary to the intending buyer and intending
seller of the securities and when the best buy order is matched with the best
sell order, the transaction is concluded which is followed by necessary
documentation. Under this system, the trading in securities is conducted in an
anonymous enviornment in such a manner that the buyers and sellers of the
securities do not know the names of each other and the same is revealed only
after the deal is finally settled. Settlement of transactions in securities
entered into by the members is done as per the procedure adopted by the stock
exchange which is continuously updated from time to time. The trading and
settlement activities are closely monitored in BSE by a system known as BSE
online surveillance system [BOSS]. As such, for the purpose of settling the
transactions entered in to by the members, delivery of securities and connected
matters, appropriate mechanism is provided by the Stock Exchange which is
governed by the relevant rules and regulations provided under the bye-laws of
the BSE. For the purpose of providing this facility of entering into trading in
securities, etc. through the BOLT system, the transaction charges are levied by
the BSE on the members, who enter into such transaction.
2.1 T he assessee company had furnished Return of Income for the Asst. Year.
2005-06 and during the relevant previous year, the assessee had paid to the BSE
an amount of Rs. 5,17,65,182 towards the transaction charges without deducting
any tax. During the assessment proceeding, the AO took the view that the
transaction charges paid by the assessee were in the nature of FTS covered u/s.
194J and therefore, the assessee was liable to deduct tax and the tax having
not being deducted, the AO disallowed the entire expenditure of transaction
charges u/s. 40(a)(ia). The first appellant authority took the view that the
Stock Exchange is not merely a mute spectator providing only physical
infrastructure to the members but it was a supervisor, overseer, manager,
controller, settlor and arbitrator over the security trading done through it
which necessarily had vital inputs and ingredients of rendering managerial
services and accordingly, confirmed the action of the AO However, the tribunal
took the view that the Stock Exchange does not render any managerial, technical
or consultancy service and the assessee was not required to deduct any tax u/s.
194J from the payment of transaction charges and consequently, provisions of
section 40(a)(ia) are not attracted. Accordingly, the disallowance made by the
AO was deleted. On these facts, the issue as to applicability of Sec. 194J to
the payment of transaction charges and consequent applicability of Sec.
40(a)(ia) came up before the Bombay High Court at the instance of Revenue. In
substance, the issue before the Court was whether the transaction charges paid
by the assessee company could be regarded as FTS covered u/s. 194J for the
purpose of making TDS and consequent disallowance u/s. 40(a)(ia).
2.2 Before the Court, on behalf of the Revenue, it was, interalia, contented
that the Stock Exchange through the BOLT system provides a trading platform
which is highly sophisticated and constantly monitored and managed by the
managerial staff of the Stock Exchange and hence, the services rendered by the
Exchange are TS covered u/s. 194J and since the assessee has failed to make
TDS, the AO was justified in disallowing the expenditure under Sec. 40(a)(ia).
On the other hand, on behalf of the assessee, it was, interalia, contented that
transaction charges paid by the assessee for the use of a system provided by
the Stock Exchange. The BOLT system, like the ATM system provided by the banks,
does neither envisage a contract for rendering technical services nor a
contract for rendering managerial services, but merely a contract for usage of
BOLT system. Mere fact that the BOLT system itself is a device set-up by using
high technology, in the absence of a contract for rendering technical services,
cannot be a ground to hold that payments of transaction charges are FTS u/s.
194J. As such, provisions of section 40 (a)(ia) are not applicable, there being
no liability to deduct tax u/s. 194J.
2.3 For the purpose of deciding the issue, the Court referred to the relevant
part of the provisions of section 194J(1) and the said Explanation as it stood
at the relevant time and noted that the plain reading of the provision shows
that the expression FTS includes rendering of any managerial services and the
question is, by providing the BOLT system for trading in securities whether the
Stock Exchange renders managerial services to its members. The Court also noted
that, the Tribunal as well as the counsel for the assessee strongly relied on
the judgment in Skycell’s case (supra), wherein it was held that the cellular
mobile service provider does not render any technical service though high
technology is involved in the cellular mobile phone and therefore, section 194J
is not attracted.
2.4 The Court then stated that the judgment of Madras High Court in Skycell’s
case is distinguishable on facts. In that case, the subscriber who had
subscribed to the network was required to pay for the air time used by the
subscriber at the rates fixed by the service provider. In the facts of that
case, the High Court took the view that the contract between the subscriber and
the service provider was to provide mobile communication network and the
subscriber was neither concerned with the technology involved in this process
nor was he concerned with the services rendered by the managerial staff in
keeping the cellular mobile phone activated. As such, the contract between the
customer and the service provider was not to receive any technical or managerial
service and the customer was only concerned with the facility of being able to
communicate with others on payment of charges. Accordingly, in that case, there
was no linkage between the contract for providing a medium of communication
through the cellular mobile phone and the technical and managerial service
rendered by the service provider in keeping the cellular mobile phone
activated.
2.4.1 The Court then proceeded to distinguish the facts of the case of the
assessee as compared to the facts before the Madras High Court in Skycell’s
case and for that purpose stated as under [pages 340-341]:
“. . … in the
present case, there is direct linkage between the managerial services rendered
and the transaction charges levied by the stock exchange. The BOLT system
provided by the Bombay Stock Exchange is a complete platform containing the
entire spectrum of trading in securities. The BOLT system not merely provides
the live connection between prospective purchasers and prospective sellers of
the respective securities / derivatives together with the rates at which they
are willing to buy or sell the securities, but also provides a mechanism for
concluding the transaction between the two parties. The BOLT system withholds
the identity of the two contracting parties, namely, the buyer and the seller
of the respective securities/ derivatives. Under the screen-based BOLT system,
the entire trading system is managed and monitored right from the stage of
providing the platform for the prospective buyers/sellers of the securities /
derivatives till the date the deal struck between the two parties are finally
settled in all respects. The very object of establishing the stock exchanges is
to regulate the transactions in securities and to prevent undesirable
speculation in the transactions. To achieve this goal, the stock exchange
continuously upgrades its BOLT system so that the transactions carried on
through that system inspire confidence in the general public and that the
transactions are settled smoothly and expeditiously. Thus, the entire trading
in securities is managed by the Bombay Stock Exchange through the BOLT system
provided by the stock exchange.
Unlike in the case of cellular mobile phones
where the user of the cellular telephone is at the discretion of the subscriber
and the service provider is not regulating user of the cellular mobile phone by
the subscriber, in the case of the BOLT system, the user of the system is
restricted to the trading in securities and the same is completely regulated by
the stock exchange. If during the course of trading, it is found that a member
is indulging in malpractices the stock exchange is empowered to suspend the
member broker apart from making him liable for various other consequences.
Thus, the decision of the Madras High Court in the case of Skycell [2001] 251
ITR 53(Mad) is totally distinguishable on facts and the Income-tax Appellate
Tribunal was in error in applying the ratio laid down therein to the facts of
the present case.”
2.5 Further, the Court rejected the contention raised on behalf of the assessee
that there was no contract to render technical/ managerial services in the
present case and stated that the very object of providing BOLT system is to
provide complete platform for carrying out these activities. It is only if a
member trades through the BOLT system, it is required to pay transaction
charges depending upon the volume of trading. Once the trading through BOLT
system takes place, the member is assured that the contracting party is a
genuine buyer or seller, as the case may be, and that the price offered by the
opposite party would be in consonance with the norms laid down by the Stock
Exchange and the transaction would be settled effectively and expeditiously.
According to the Court, the measure of levying the transaction charges is not
relevant and the fact that transaction charge is based on the value of the
transaction and not on the volume is not determinative of the fact as to
whether managerial services are rendered or not.
2.6 Proceeding further, in support of the view that the case is covered u/s.
194 J, the Court further observed as under [page 342]: “Unless the stock
exchange constantly monitors the transactions relating to the sale or purchase
of the securities right from the stage when the two contracting parties
interact through the BOLT system, it would be impossible to ensure safety of
the market. When there is considerable variation in the price of the securities
offered to be sold or purchased the in-built system alerts and remedial measures
are taken immediately so that no panic situation arises in the stock market.
With a view to regulate the trading in securities, the stock exchange provides
risk management and surveillance to the stock brokers to ensure the safety of
the market. The surveillance function involves price monitoring, exposure of
the members, rumour verification on a daily basis and take remedial actions
like reduction of filters, imposition of special margin, transferring scrips on
a trade to trade settlement basis, suspension of scrips/members, etc. These are
some of the identified managerial services rendered by the stock exchange for
which transaction charges are levied. ”
2.6.1 In support of the above, the Court further pointed out as under [page
342]: “The fact that the BOLT system provided by the stock exchange has
in-built automatic safeguards which automatically gives alert signal if the
fluctuation in the prices of the securities exceed a particular limit
prescribed by the stock exchange does not mean that the managerial services are
not rendered, because , firstly, the in-built mechanism in the BOLT system
itself is a part of the managerial service rendered by the stock exchange and,
secondly, even the in-built mechanism provided in the system is varied or
altered by the stock exchange depending upon the circumstances encountered
during the course of rendering managerial services.”
2.7 Rejecting the argument that the BOLT system is like the ATM system provided
by the banks, the Court stated that no trading activity is carried on at the
ATM like under the BOLT system under which the activity is
monitored/regulated/managed by the Stock Exchange.
2.8 Considering the above, on the issue of applicability of section 194J, the
Court finally held as under [pages 342-343]: “In the result, we hold that
when the stock exchanges are established under the Securities Contracts
(Regulation) Act, 1956, with a view to prevent undesirable transactions in
securities by regulating the business of dealing in shares, it is obvious that the
stock exchanges have to manage the entire trading activity carried on by its
members and accordingly managerial services are rendered by the stock
exchanges. Therefore, in the fact of the present case, the transaction charges
were paid by the assessee to the stock exchange for rendering the managerial
services which constitutes fees for technical services u/s. 194J read with
Explanation 2 to section 9(1)(vii) of the Act and hence the assessee was liable
to deduct tax at source before crediting the transaction charges to the account
of the stock exchange. ”
2.8.1 From the above, it would appear that the Court took the view that, the
Stock Exchange is rendering managerial services. According to the Court, the
in-built mechanism in the BOLT system is itself a part of managerial services
rendered by the Stock Exchange and even such in-built mechanism provided, is
varied or altered as per the need during the course of rendering managerial
service. As such, the payment of transaction charges is FTS, as the definition
of FTS includes consideration for managerial services and accordingly, the same
is covered by section 194J.
2.9 The Court then dealt with the issue of disallowance u/s. 40(a)(ia). After
considering the object of the introduction of section 40(a)(ia) as explained in
CBDT circular No/ 5 dtd 15th July, 2005, the Court noted that during the period
1995-2005, neither the assessee made TDS from the payment of transaction
charges nor the Revenue raised any objection or initiated any proceedings for
default in making TDS. The Court, under the circumstances, felt that nearly for
a decade both the parties proceeded on the footing that section 194J is not
attracted. Under the circumstances, according to the Court, no fault can be
found with the assessee for not making TDS u/s. 194J for the assessment year in
question [Asst Year 2005-06].The Court also noted that from the Asst Year
2006-07, the assessee has started deducting tax from such payments, though not
as FTS but as royalty. The Court also noted that, presumably, the Revenue has
not suffered any loss for non- deduction of tax as the Stock Exchange has
discharged its tax liability for that year. On these facts, the Court took the
view that no action can be taken u/s. 40(a)(ia) and held as under [page 343]:
” In any event, in the facts of the present case, in view of the
undisputed decade old practice, the assessee had bona fide reason to believe
that the tax was not deductible at source u/s. 194J of the Act and, therefore,
the Assessing Officer was not justified in invoking section 40(a)(ia) of the
Act and disallowing the business expenditure by way of transaction charges
incurred by the assessee.”
2.10 From the above, it is worth noting that though the Court held that the
payment of transaction charges constitutes FTS covered u/s. 194J, under
peculiar circumstances, the Court also took a fair view that disallowance u/s.
40(a)(ia) cannot be made as both the Revenue and the assessee were under the
bona fide belief for nearly a decade that the tax was not required to be
deducted.
