CIT vS. Kotak Securities Ltd . – Unreported – Civil Appeal No. 3141 of 2016 (SC)
3. As stated in Part I of this write-up, the Bombay High Court in the case of Kotak Securities Ltd. took the view that the Stock Exchange is rendering managerial services by providing in-built mechanism for trading in securities to its members and therefore, the payment of transaction charges by the members to the Stock Exchange is ‘fees for technical services’ [FTS] as the definition of the FTS includes consideration for ‘managerial services’ and accordingly, the same is covered by section 194J. At the same time, the High Court also held that both the parties for a decade proceeded on the footing that provisions to Sec. 194J were not applicable in this case and therefore, the disallowance u/s. 40(a)(ia) is not justified. Taking this judgment of the Bombay High Court as a lead case for the purpose of deciding the similar issues arising in various appeals before the Apex Court, the Court dealt with the judgment of the Bombay High Court for the purpose of deciding the issue referred to in para 1.5 of Part-I of this write-up.
3.1 For the purpose of deciding the issue of applicability of section 194J to the payment of transaction charges and consequent disallowance of the expenses in computing the business income, the Court noted the view taken by the Bombay High Court referred to in para 3 above. Before the Apex Court, the assessee had challenged the view of the Bombay High Court that the payment of the transaction charges to the Stock Exchange amounts to FTS covered u/s. 194J and the Revenue had challenged the view of the High Court that the disallowance u/s. 40(a)(ia) cannot be made for the Asst. Year in question.
3.2 The Court then noted the relevant parts of provisions of section 194J, Sec. 40(a)(ia) and the definition of FTS given in the said Explanation to section 9(1)(vii) as they stood at the relevant time.
3.3 Having referred to the relevant provisions of the Act, the Court stated that the moot question is what meaning should be ascribed to the expression ‘technical services’ [TS] appearing in the definition of FTS. For this purpose, the Court noted the following observations from its judgment in the case of Bharti Cellular Ltd (referred to in para 1.4 of Part –I of this write-up) :
“Right from 1979, various judgments of the High Courts and Tribunals have taken the view that the words “technical services” have got to be read in the narrower sense by applying the rule of noscitur a sociis, particularly, because the words “technical services” in section 9(1)(vii) read with Explanation 2 comes in between the words “managerial and consultancy services”.
3.3.1 Dealing with the above view taken in the case of Bharti Cellular Ltd (supra), the Court observed as under:
“Managerial and consultancy services” and, therefore, necessarily “technical services”, would obviously involve services rendered by human efforts. This has been the consistent view taken by the courts including this Court in Bharti Cellular Ltd. (supra). However, it cannot be lost sight of that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which such services may be provided. The search for a more effective basis, therefore, must be made.”
3.4 Referring to a lengthy discourse on the services made available by the Stock Exchange contained in the Assessment order, the Court observed that this would go to show that apart from facilities of a faceless screen-based transaction, a constant up gradation of such services 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 by the Stock Exchange and specifically noted that all such fully automated services are available to all the members of Stock Exchange in respect of every transaction entered into by them. The Court also noted that there is nothing special/exclusive or customized in the service that is rendered by the Stock Exchange.
3.4.1 Having noted the above factual position, the Court proceeded to deal with the meaning of words ‘technical services’ in the context of the definition of the FTS and its applicability to the present case. In this context, the Court stated as under:
“. . .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. ”
3.4.2 Having taken a view that the services rendered by the Stock Exchange would be merely in the nature of facility offered or available to its all members which cannot be regarded as ‘technical services’ as contemplated in the definition of the FTS as given in the said Explanation, the Court felt that another aspect of this matter also requires to be specifically noted and that is, each and every transaction by a member involves the use of such services provided by the Stock Exchange on compulsory payment of additional charges based on transaction value over and above the membership charges. The Court also noted that the view taken by the High Court that the member of the Stock Exchange has the option of trading through an alternative mode is not correct and the member has no option in this matter but to avail of such services. Having noted this additional specific aspect, the Court further stated as under:
“. . . 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.”
3.5 Finally, while deciding the issue raised by the assessee in appeal in its favour, the Court concluded as under:
“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.”
3.6 Having decided that the services rendered by the Stock Exchange would be termed as facilities provided by the Stock Exchange which does not amount to TS as contemplated in the definition of the FTS given in the said Explanation and hence, the payment of transaction charges does not amount to FTS u/s. 194J, the Court further decided that in view of this conclusion, it is not necessary to examine the correctness of the view of the Bombay High Court with regard to the issue of disallowance u/s. 40(a)(ia). As such, this issue still remains open.
Conclusions
4 From the above judgment, the position is now settled that there is a clear distinction between services and facilities provided by the service provider and the latter, even if termed as a service, cannot be regarded as TS within the narrower meaning of those words appearing in the definition of FTS.
4.1.1 From the above judgment, in the context of meaning of the words TS appearing in the definition of FTS, it becomes clear that for a service to be regarded as TS, like ‘managerial and consultancy service’, it should cater to special needs of the customer/ user, as may be felt necessary, which is rendered by the service provider. Accordingly, it should be specialised and exclusive to the service seeker. It has to be a service specifically sought by the user or customer. This feature of a service rendered is the essential hallmark of the expression TS. As such, in this context, the test of specialised, exclusive and individual requirement of the user/ consumer [`exclusivity test’] should be satisfied to treat the consideration for service as FTS. Therefore, it appears that the general/standard services provided by an entity, which is available to everyone who intends to avail the same, should be regarded as service in the nature of facility offered or available to all and the same will not fall within the meaning of TS as contemplated in the definition of FTS.
4.1.2 The above meaning of the words TS appearing in the definition of FTS would go a long way in considering the applicability of section 9(1)(vii) as well as of section 194J. As such, this would also be very useful for interpreting the expression FTS under many Double Tax Avoidance Agreements (‘tax treaties’) entered into by India with other countries where the relevant portion of the definition of the expression FTS is identical to the one given in the said Explanation.
4.1.3 The services provided by the Stock Exchange in the above case do not satisfy the ‘exclusivity test’. As such payment of transaction charges does not amount to FTS and therefore, cannot be regarded as TS.
4.2 From the observations of the Apex Court in the above case mentioned in para 3.3 above, it would appear that the Court reiterated the principle emerging from the judgment of Apex Court in the case of Bharat Cellular Ltd. (supra) that the words TS appearing in the definition of FTS have got to be read in a narrower sense.
4.2.1 In the above context, the Court also reaffirmed the interpretation that human involvement is necessary for treating a service provided as TS within the meaning of the definition of FTS.
4.2.2 Further, in the above context, the Court also felt that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which service may be provided and hence, search for a more effective basis may be made. It seems that these observations of the Court do not affect the settled position referred to in paras 4.2 and 4.2.1 and the same should be read in the context of the facts of the case before the Court.
4.3 Interestingly, the Bombay High Court treated the payment of transaction charges as FTS covered u/s. 194J on the ground that the services rendered by the Stock Exchange are in the nature of ‘managerial services’ as mentioned in para 2.8.1 of Part-I of this write-up and para 3 above. However, the Apex Court did not deal with this specific view taken by the Bombay High Court but dealt with the meaning of the words TS appearing in the definition of FTS and proceeded on that basis to decide the issue without considering the aspect of ‘managerial services’ considered by the Bombay High Court. However, it seems to us that this should not make any difference to the final view taken by the Apex Court. In the above case, the Court has also held that the services rendered by the Stock Exchange are in the nature of facility offered or available and they also do not satisfy the ‘exclusivity test’.
4.4 As pointed out in para 2.9 of Part- I of this write-up and para 3 above, the Bombay High Court also took the view that for a decade, both the parties have proceeded on the footing that section 194J was not applicable to the payment of transaction charges. On this peculiar facts, the disallowance u/s. 40(a) (ia) cannot be made for the year in question before the Court. The correctness of this view has not been examined by the Apex Court as stated in the para 3.6 above. In view of this, the said view of the Bombay High Court stills holds good and could be useful to contest the disallowance u/s. 40(a)(ia), if the facts of a particular case are similar to the case before the Bombay High Court in the case of Kotak Securities Ltd. (supra)
4.5 As mentioned in para 1.1 of Part- I of this writeup, section 194J is amended with effect from 13/7/2006 to include within its scope payment by way of ’royalty’. For this purpose, the definition of royalty given in Explanation 2 to section 9(1)(vi) is made applicable, which, in turn, is very wide and includes any consideration paid for the use of any industrial, commercial or scientific equipment (with some exceptions) – popularly known as ‘equipment royalty’, etc,. From the judgment of the Bombay High Court in the above case, it appears that the assessee had started deducting tax u/s. 194J from the subsequent year from payment of transaction charges as ‘royalty’ as observed by the Bombay High Court (refer para 2.9 of Part- I of this write-up).
4.5.1 In the above judgment, the Apex Court has taken a view that the Stock Exchange is rendering services which are in the nature of facility provided/offered and therefore, not a TS within the meaning of the definition of FTS as mentioned in paras 3.4.1 & 3.4.2 above. Therefore, the moot question may arise as to whether the payment of transaction charges could at all be regarded as ‘royalty’, the same being paid primarily for the services rendered, which, though, may be regarded as in the nature of facility provided/offered. This may need separate consideration.
4.6 In view of the amendment made in section 40(a) (ia) by the Finance Act, 2012, with the introduction of the second proviso w.e.f. 1/4/2013, providing relaxation from the rigor of this provision for disallowance, when certain conditions mentioned in the first proviso [introduced by the Finance Act, 2012 w.e.f. 1/7/2012] to section 201(1) are met [such as the resident payee has furnished the Return of Income u/s. 139, he has taken into account such payment in computing his income, etc.], the disallowance u/s. 40(a)(ia) could be avoided on that basis. However, this relaxation applies only when the payee is a resident and, the benefit of this relaxation is not available if the payee is not a resident. As such, the above judgment would be more useful in cases where the payee is not a resident and the applicability of TDS requirement to the payment for services as well as disallowance u/s. 40(a)(i) is to be contested.
