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Thursday, March 31, 2016

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 by the 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. 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.

                                                                  REPORTABLE

                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION

                        CIVIL APPEAL NO.3141 OF 2016
                 [Arising out of S.L.P.(C) No.19907 of 2012]

C.I.T.-4,        MUMBAI                                      ...APPELLANT(S)
                     VERSUS

M/S KOTAK SECURITIES LTD.                    ...RESPONDENT(S)

                                    WITH

CIVIL APPEAL NO. 3143  OF  2016  [Arising  out  of  Special  Leave  Petition
(Civil) No.19908 of 2012], CIVIL APPEAL NO.3145  OF  2016  [Arising  out  of
Special Leave Petition (Civil) No.19909 of 2012], CIVIL  APPEAL  NO.3146  OF
2016  [Arising out of Special Leave  Petition  (Civil)  No.33059  of  2012],
CIVIL APPEAL NO.3150 OF 2016 [Arising out of Special Leave Petition  (Civil)
No.37694 of 2012], CIVIL APPEAL NO.3151 OF  2016  [Arising  out  of  Special
Leave Petition (Civil) No.17553 of 2015],  CIVIL  APPEAL  NO._3152  OF  2016
[Arising out of Special Leave  Petition  (Civil)  No.5893  of  2015],  CIVIL
APPEAL NO.3154 OF 2016  [Arising  out  of  Special  Leave  Petition  (Civil)
No.17549 of 2015], CIVIL APPEAL NO.3155 OF  2016  [Arising  out  of  Special
Leave Petition (Civil) No.18394 of  2015]  AND  CIVIL  APPEAL  NO.3156  2016
[Arising out of Special Leave Petition (Civil) No.8294 of 2016 @ CC  NO.3427
of 2016]



                               J U D G M E N T

RANJAN GOGOI, J.

1.          Leave granted in all the Special Leave Petitions.
2.          Civil Appeal arising  out  of  Special  Leave  Petition  (Civil)
No.37694 of 2012 (M/s Kotak  Securities  Ltd.  Vs.  C.I.T.4(3),  Mumbai)  is
taken as the lead case as a decision on the issue(s) arising  therein  would
determine  the  questions  arising  in   all   the   other   appeals   under
consideration.

3.          By the impugned order dated 21st October,  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.
4.          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.


5.          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(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 for 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
any subsequent 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.-.........



9. Income deemed to accrue or arise in India      (1) The following  incomes
shall be deemed to accrue or arise in India:-
(i).....................
…......................
…......................
(vii) income by way of fees for technical services payable by—
(a) ...............
(b) ...............
(c) ...............
….......................
Explanation  2.—For  the  purposes  of  this  clause,  "fees  for  technical
services" means any consideration (including  any  lump  sum  consideration)
for the rendering of  any  managerial,  technical  or  consultancy  services
(including the provision of services of technical or  other  personnel)  but
does not include consideration for any  construction,  assembly,  mining  or
like project undertaken by the recipient or  consideration  which  would  be
income of the recipient chargeable under the head "Salaries".


6.           What  meaning  should  be  ascribed  to  the  word   “technical
services” appearing in Explanation 2 to clause (vii) to Section 9(1) of  the
Act is  the  moot  question.   In  Commisioner  of  Income-Tax   Vs.  Bharti
Cellular Ltd.[1] this Court has observed as follows:

“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”.

7.           “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.

8.      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
nothing special, exclusive or customised service that  is  rendered  by  the
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.

9.          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  by  the
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.

10.         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.

11.         In view of above conclusions, it will not be  necessary  for  us
to examine the correctness of the view taken by the Bombay High  Court  with
regard to the issue of the disallowance under Section 40(a)(ia) of the  Act.
 All the appeals, therefore, shall stand disposed in the light of our  views
and observations as indicated above.

                                               ….……......................,J.
                                                              [RANJAN GOGOI]



                                               ….……......................,J.
                                                          [PRAFULLA C. PANT]

NEW DELHI
MARCH 29, 2016
-----------------------
[1]
       (2011) 330 ITR 239 (SC)

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