2011 (10) TMI 24 - HC - Income Tax

Transaction charges are technical service fees under Section 194J, but bona fide belief negates Section 40(a)(ia) disallowance

HC held that transaction charges paid to stock exchanges constitute fees for technical services under Section 194J, so tax was technically deductible at ... Transaction charges paid to the stock exchanges - fees for technical services TDS u/s 194J - 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 ? - Held that:- 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 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 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. 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. 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. Issues Involved:1. Applicability of Section 194J of the Income Tax Act, 1961 to transaction charges paid by the assessee to the stock exchange.2. Whether transaction charges constitute 'fees for technical services' under Section 194J.3. Justification for disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 due to non-deduction of tax at source.Issue-wise Detailed Analysis:1. Applicability of Section 194J to Transaction Charges:The primary issue revolves around whether the transaction charges paid by the assessee to the stock exchange qualify as 'fees for technical services' under Section 194J of the Income Tax Act, 1961. The Tribunal had held that the stock exchange does not render any managerial or technical consultancy service, and thus, Section 194J was not applicable. However, the revenue argued that the BOLT system provided by the stock exchange is highly sophisticated and managed by the stock exchange's staff, thereby constituting technical services.2. Whether Transaction Charges Constitute 'Fees for Technical Services':The court examined whether the transaction charges paid for the BOLT system, which facilitates trading in securities, qualify as fees for technical services. The court distinguished this case from the Madras High Court's decision in Skycell Communications Ltd. v. DCIT, where it was held that cellular mobile telephone services do not constitute technical services. The court noted that unlike in Skycell, the BOLT system involves direct managerial services, as it provides a complete trading platform, monitors transactions, and ensures the safety and efficiency of the trading process. Therefore, the court concluded that the transaction charges paid by the assessee to the stock exchange do constitute fees for technical services under Section 194J.3. Justification for Disallowance under Section 40(a)(ia):The court then addressed whether the assessing officer was justified in disallowing the transaction charges under Section 40(a)(ia) due to the assessee's failure to deduct tax at source. The court considered the historical context, noting that both the revenue and the assessee had operated under the belief that Section 194J was not applicable to transaction charges from 1995 until the assessment year in question (2005-06). Given this decade-long practice, the court found that the assessee had a bona fide reason to believe that tax was not deductible at source. It was also noted that from AY 2006-07, the assessee had been deducting tax at source on transaction charges. Consequently, the court held that the assessing officer's invocation of Section 40(a)(ia) was not justified in this particular case.Conclusion:The court concluded that the transaction charges paid by the assessee to the stock exchange do constitute 'fees for technical services' under Section 194J, and thus, the assessee was liable to deduct tax at source. However, due to the bona fide belief held by both parties for nearly a decade that Section 194J was not applicable, the court held that the disallowance under Section 40(a)(ia) could not be sustained for the assessment year in question. The appeal was disposed of with no order as to costs, clarifying that this conclusion was specific to the peculiar facts of the case.