Bombay High Court
Aayakar Bhavan vs Point on 21 October, 2011
Bench: J.P. Devadhar, A.A. Sayed
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sas
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.3111 OF 2009
The Commissioner of Income Tax-4(3) )
Aayakar Bhavan, M.K. Road, Churchgate, )
Mumbai - 40 020. ) ..Appellant.
V/s.
M/s. Kotak Securities Limited,
1st Floor, Bakthawar 229, Nariman
)
)
Point, Mumbai - 400 021. ) ..Respondent.
Mr. Vimal Gupta for appellant.
Mr. F.V. Irani with Atul K. Jasani for respondent.
Dr. K. Shivram with Mr. Ajay Singh, Mr. S.C. Tiwari with Ms. Natasha, Mr.
Rajeev Wagley and Mr. Pankaj Toprani for Intervenors.
CORAM : J.P. DEVADHAR AND A.A.SAYED, JJ.
JUDGMENT RESERVED ON : 11TH AUGUST, 2011
JUDGMENT PRONOUNCED ON : 21ST OCTOBER, 2011
JUDGMENT (PER J.P. DEVEDHAR, J.)
1) Although six questions of law are raised by the revenue in
this appeal, learned counsel for the revenue does not press the first five
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questions as the said questions stand answered against the revenue by
the decisions of the Apex Court in the case of Techno Shares and
Stocks Ltd. V/s. CIT reported in [2010] 327 ITR 323 (S.C.) and T.R.F.
Ltd. V/s. CIT reported in [2010] 323 ITR 397 (SC).
2) The appeal is admitted on the sixth question of law and
taken up for hearing by consent of parties. The sixth question of law
(reframed) reads thus:-
" Whether on the facts and in the circumstances of the case and in
law, the Tribunal was justified in holding that the transaction charges
paid by the assessee to the stock exchanges were not fees for
technical services and, therefore, the provisions of Section 194J
were not attracted and consequently the provisions of Section 40(a)
(ia) of the Income Tax Act, 1961 were also not attracted ? "
3) Since several appeals are pending before this Court wherein
similar question is raised, we have permitted counsel for the assessees
in those appeals to appear as 'intervenors'.
4) The assessment year involved herein is AY 2005-06.
5) The respondent-assessee is a company engaged in the
business of share broking, depositories, mobilization of deposits and
marketing of public issues.
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6) Trading in securities are carried out through various Stock
Exchanges such as National Stock Exchange of India (NSE), Bombay
Stock Exchange (BSE), etc. which are recognized Stock Exchanges
under the provisions of the Securities Contracts (Regulation) Act, 1956.
7) The stock exchanges are established for the purpose of
assisting, regulating or controlling the business of buying, selling or
dealing in securities.ig The recognized stock exchanges are empowered
inter alia to make bye laws for the regulation of, entering into, making,
performance and termination of contracts including contracts between
members or between a member and its constituent or between a
member and a person who is not a member and the consequences of
default or insolvency on the part of a seller or buyer or intermediary, the
consequences of a breach or omission by a seller or buyer and the
responsibility of members who are not parties to such contracts.
8) Trading in securities were traditionally carried out under the
open outcry system where the member brokers used to assemble in a
trading ring for doing transaction in securities. To facilitate smooth
trading, the open outcry system has been replaced by the BSE by
introducing the BSE On-line Trading (BOLT) system. Similarly, the NSE
has introduced the National Exchange for Automated Trading (NEAT)
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System. For the sake of convenience, we deal with the BOLT system
devised by the BSE. The BOLT system was introduced by the BSE with
effect from 14-3-1995. This totally automated screen based trading in
securities, facilitates the member brokers to trade in securities from the
Trader Work Stations installed in their offices instead of assembling in
the trading ring.
9) The trading in securities at the Exchange is conducted in an
anonymous environment and the identify of the counter-party is not
revealed on the screen based BOLT system with a view to ensure that
the transactions are carried out in a free and fair manner and there is no
scope for malpractices. Thus, the buyers and sellers of securities do
not know the names of each other and the same is revealed only after
the deal is finally settled.
10) Settlement of the 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 of the member brokers are closely monitored
through On-line Real Time System known as BSE on-line Surveillance
system ('BOSS' for short). This system enables the Exchange to detect
market abuses at a nascent stage, improve the risk management system
and strengthen the self- regulatory mechanisms.
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11) To regulate and control the contracts for sale and purchase
of securities, the recognized stock exchanges have framed Bye-laws
which are duly approved by the Securities & Exchange Board of India
(SEBI). As per the bye laws framed by the BSE which are duly approved
by SEBI, the BSE is entitled to charge its members various fees, such
as, listing fees, admission fees, arbitration fees, transaction charges, etc.
12) Transaction charges are levied by the BSE on the members
who enter into transactions in securities / derivatives through the BOLT
system provided by the BSE. BOLT system is a screen based system
where the trading operations are made interactive by connecting the
various stock brokers to the stock exchange though VSAT and lease line
connections provided by the exchange to its members, The BOLT
system provides all the data that is necessary for a intending buyer and
intending seller of the respective securities. When a best buy order is
matched with the best sell order the transaction is concluded. Under
the BOLT system, members can proactively enter orders in the system
which is displayed in the system till the full quantity is matched by one or
more of counter orders and result into a transaction. In respect of the
transactions carried out through the BOLT system, the exchange collects
transaction charges depending upon the value of the transactions.
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13) In the assessment year in question, the assessee had paid
to the BSE Rs.5,17,65,182/- towards transaction charges. The question
is, whether the said payment of transaction charges constituted payment
of 'fees for technical services' covered under Section 194J of the Income
Tax Act, 1961 ('the Act' for short) so as to hold that the assessee was
liable to deduct tax at source at the time of crediting the transaction
charges to the account of the stock exchange.
14) The assessing officer was of the opinion that the transaction
charges paid by the assessee were in the nature of 'fees for technical
services' covered under Section 194J of the Act and, therefore, the
assessee was liable to deduct tax at source at the time of making
payment to the BSE. As the assessee had not deducted tax at source,
the assessing officer held that in view of Section 40(a)(ia) of the Act, the
entire expenditure of Rs.5,17,65,182/- incurred by the assessee by way
of transaction charges was liable to be disallowed.
15) On appeal filed by the assessee, the CIT(A) upheld the
decision of the assessing officer by holding that the stock exchange is
not merely a mute spectator providing only physical infrastructure to the
members but the stock exchange was a supervisor, overseer, manager
controller, settlor and arbitrator over the security trading done through
the stock exchange which necessarily had vital inputs and ingredients of
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rendering managerial services and, therefore, the provisions of Section
194J was applicable to the facts of the present case.
16) On further appeal filed by the assessee, the ITAT by the
impugned order held that the stock exchange does not render any
managerial service or render any technical consultancy service and,
therefore, transaction charges were not covered under Section 194J of
the Act and consequently Section 40(a)(ia) of the Act was also not
attracted. Accordingly, the Tribunal deleted the disallowance made by
the assessing officer. Challenging the aforesaid order of the ITAT, the
revenue has filed the present appeal.
17) According to the revenue, the transaction charges paid by
the assessee to the stock exchange constitute fees for technical services
under Section 194J read with Explanation 2 to clause (vii) of the Section
9(1) of the Act, because, 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 stock exchange are technical
services covered under 194J of the Act and, therefore, it was obligatory
on the part of the assessee to deduct tax at source at the time of making
payment to the stock exchange. Since the assessee failed to deduct
tax at source, the assessing officer was justified in invoking Section
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40(a)(ia) of the Act. On the other hand, counsel for the assessee as
also counsel for the intervenors strongly supported the order passed by
the ITAT and submitted that the transaction charges were paid by the
assessee for user of a system provided by the stock exchanges. It is
contended that 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 user of the BOLT system. Therefore, in the absence of a contract
for rendering the technical services, the fact that the BOLT system itself
is a device set up by using high technology cannot be a ground to hold
that the transaction charges are fees for technical services under
Section 194J of the Act and hence Section 194J is not applicable to the
facts of the present case and consequently, the provisions of Section
40(a)(ia) are also not applicable to the facts of the present case.
18) Before considering the rival submissions, it would be
appropriate to refer the relevant provisions of the Act. Section 194J was
inserted to the Act by the Finance Act, 1995 with effect from 1/7/1995.
Material part of Section 194J as it stood at the time relevant to AY
2005-06 reads thus :-
" 194J. (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 ....
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(a) fees for professional services, or
(b) fees for technical services,
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 compromised therein;
Provided that .......
Provided further that --------
Provided also ........
Explanation : For the purposes of this Section --
(a) 'Professional services' means .....
(b) 'fees for technical services' shall have the same
meaning as in Explanation 2 to clause (vii) of
sub-section (1) of Section 9;
(c) ------
19) Explanation 2 to Section 9(1)(vii) reads thus :-
" 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
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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" ;
20) Thus, plain reading of Section 194J read with Explanation 2
to Section 9(1)(vii) of the Act clearly shows that the expression 'fees for
technical services' includes rendering of any managerial services. The
question is, by providing BOLT system of trading in securities, whether,
the stock exchange renders managerial services to its members ?
21) The ITAT as also the counsel for the assessees have
strongly relied on the decision of the Madras High Court in the case of
Skycell Communications Ltd. V/s. DCIT reported in 251 I.T.R. 53 (Mad)
['Skycell' for short] wherein it was held that the cellular mobile telephone
service provider does not render technical service though high
technology is involved in the cellular mobile phone and, therefore,
Section 194J of the Act cannot be applied to the payments made by the
subscriber to the cellular mobile telephone service provider.
22) In our opinion, the decision of the Madras High Court in the
case of Skycell 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 rate fixed by the service provider. The
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question before the Madras High Court was, whether the amount paid by
the subscriber for the air time used on the cellular mobile phone
constituted fees for technical services ? In the facts of that case, the
Madras High Court held 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 the
cellular mobile phone nor the subscriber was concerned with the
services rendered by the managerial staff in keeping the cellular mobile
phone activated. It was held that the contract between the customer and
the service provider therein was not to receive any technical service or
managerial service and the customer was only concerned with the
facility of being able to communicate with others on payment of charges
for the air time used. Thus, there was no linkage between the contract
for providing a medium of communication through the cellular mobile
telephone and the technical or managerial service rendered by the
service provider in keeping the cellular mobile phone activated.
23) However, 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
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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.
24) 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 BOLT system, the user of the system is
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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 is totally distinguishable on facts and the
ITAT was in error in applying the ratio laid down therein to the facts of the
present case.
25)
The argument that in the present case there was no contract
for rendering technical / managerial service is without any merit,
because, the very object of providing the BOLT system is to provide a
complete platform for carrying on the trading in securities / derivatives.
If a member of the stock exchange does not enter into any transaction
under the BOLT system he is not required to pay the transaction
charges. It is only if the member trades through the BOLT system the
member is required to pay transaction charges depending upon the
volume of trading because, once the trading through the BOLT system
takes place the member is assured that the other 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 norm laid down by
the stock exchange and that the transaction would be settled efficiently
and expeditiously. The fact that the stock exchange levies or collects
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lesser transaction charges where the value of the transaction is higher,
cannot be a ground to hold that no managerial services are rendered by
the stock exchange, because, what should be the criteria for levying the
transaction charges is left to the discretion of the stock exchange. The
fact that the transaction charge is based on the value of the transaction
and not the volume of transaction is not determinative of the fact as to
whether managerial services are rendered or not. In other words,
whatever be the measure for levying the transaction charges, the fact
remains that the stock exchange regulates and manages the entire
trading activities on the exchange till the transactions are finally settled.
26) 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
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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.
27) 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.
28) The argument that the BOLT system is like a ATM system
provided by the banks is also without any merit, because through the
ATM system, no trading activity is carried on, whereas, through the
BOLT system trading activity is carried on which is monitored /
regulated / managed by the stock exchange. Therefore, in our opinion,
the Tribunal was in error in holding that no technical or managerial
services are rendered by the stock exchange by providing the BOLT
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system of trading in securities.
29) 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 facts 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 under Section 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.
30) The question then to be considered is whether the
assessing officer was justified in invoking Section 40(a)(ia) of the Act and
disallowing the entire business expenses incurred on account of
transaction charges on the ground that the assessee has failed to deduct
tax at source under Section 194J of the Act ?
31) The object of introducing Section 40(a)(ia) as explained in
the CBDT circular No.5 dated 15/7/2005 is to augment compliance of
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TDS provisions in the case of residents and curb bogus payments.
Moreover, though Section 194J was inserted with effect from 1/7/1995,
till the assessment year in question that is AY 2005-06 both the revenue
and the assessee proceeded on the footing that Section 194J was not
applicable to the payment of transaction charges and accordingly, during
the period from 1995 to 2005 neither the assessee has deducted tax at
source while crediting the transaction charges to the account of the stock
exchange nor the revenue has raised any objection or initiated any
proceedings for not deducting the tax at source. In these circumstances,
if both the parties for nearly a decade proceeded on the footing that
Section 194J is not attracted, then in the assessment year in question,
no fault can be found with the assessee in not deducting the tax at
source under Section 194J of the Act and consequently, no action could
be taken under Section 40 (a)(ia) of the Act. It is relevant to note that
from AY 2006-07 the assessee has been deducting tax at source while
crediting the transaction charges to the account of the stock exchange
though not as fees for technical services but as royalty. It is further
relevant to note that it is not the case of the revenue that on account of
the failure on the part of the assessee to deduct tax at source, the
revenue has suffered presumably because, the stock exchange has
discharged its tax liability for the assessment year in question. In any
event, in the facts of the present case, in view of the undisputed decade
old practice, the assessee had bonafide reason to believe that the tax
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was not deductible at source under Section 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.
32) Accordingly, we hold that the transaction charges paid by
the assessee to the stock exchange constitute 'fees for technical
services' covered under Section 194J of the Act and, therefore, the
assessee was liable to deduct tax at source while crediting the
transaction charges to the account of the stock exchange. However,
since both the revenue and the assessee were under the bonafide belief
for nearly a decade that tax was not deductible at source on payment of
transaction charges, no fault can be found with the assessee in not
deducting the tax at source in the assessment year in question and
consequently disallowance made by the assessing officer under Section
40(a)(ia) of the Act in respect of the transaction charges cannot be
sustained. We make it clear that we have arrived at the above
conclusion in the peculiar facts of the present case, where both the
revenue and the assessee right from the insertion of Section 194J in the
year 1995 till 2005 proceeded on the footing that the assessee is not
liable to deduct tax a source and in fact immediately after the
assessment year in question i.e. from AY 2006-07 the assessee has
been deducting tax at source while crediting the transaction charges to
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the account of the stock exchange.
33) The question raised in the appeal is answered accordingly
and the appeal is disposed off in the above terms with no order as to
costs.
(A.A.SAYED, J.) (J.P. DEVADHAR, J. )
