2014 (11) TMI 8 - AT - Income Tax

Tribunal decision on transaction & VSAT charges disallowance under tax law

The Tribunal partially allowed the Revenue's appeal by affirming the disallowance of transaction charges under section 40(a)(ia) but rejecting the ... Disallowance under section 40(a)(ia) - tax deduction at source (TDS) under section 194J - paid versus payable in section 40(a)(ia) - obiter dicta and ratio decidendi - application of rule 8D and disallowance under section 14ADisallowance under section 40(a)(ia) - tax deduction at source (TDS) under section 194J - paid versus payable in section 40(a)(ia) - obiter dicta and ratio decidendi - Whether payments labelled as transaction charges and V-SAT charges required TDS and consequent disallowance under section 40(a)(ia), and whether the 'paid'/'payable' contention relied on Allahabad High Court binds this forum. - HELD THAT: - The Tribunal held that transaction charges fall within fees for technical/professional services attractable to TDS under section 194J and, following the later decision of the Hon'ble Bombay High Court in CIT v. Kotak Securities Ltd., the Assessing Officer was right to disallow the transaction charges under section 40(a)(ia). By contrast, V-SAT charges were held not to be fees for technical services and therefore not exigible to TDS; the Tribunal followed the decision of the Hon'ble Bombay High Court in CIT v. Angel Capital & Debit Market Ltd. The alternative contention invoking the Allahabad High Court decision in Vector Shipping Services - that amounts paid during the year should not be disallowed because the provision applies only to amounts 'payable' - was examined and rejected. The Tribunal found that the Allahabad High Court's observation on 'paid versus payable' was obiter in that case and did not constitute a ratio; it instead followed the ratio of the Calcutta and Gujarat High Courts which interpret section 40(a)(ia) as not being confined to amounts remaining payable at year-end and which decline to adopt the Special Bench reasoning in Merilyn Shipping. Consequently the Tribunal allowed the appeal partly in respect of V-SAT charges and sustained the disallowance in respect of transaction charges. [Paras 4, 11]Transaction charges attract TDS under section 194J and the related disallowance under section 40(a)(ia) is sustained; V-SAT charges do not constitute technical services and no disallowance under section 40(a)(ia) is made; the 'paid vs payable' observation in Vector Shipping is obiter and the Calcutta and Gujarat High Court ratio is followed.Application of rule 8D and disallowance under section 14A - Whether disallowance under section 14A computed by applying rule 8D could be made for assessment year 2007-08, and if not, what basis should be applied for determining the disallowance. - HELD THAT: - The Tribunal accepted the Commissioner (Appeals)'s conclusion that rule 8D is not applicable to assessment year 2007-08 and therefore the Assessing Officer could not apply the formulation of rule 8D for that year. In place of rule 8D, the Commissioner (Appeals) had directed the Assessing Officer to determine a reasonable basis for apportioning expenditure attributable to exempt income - applying a ratio of expenditure debited to profit and loss account to the value of transactions yielding exempt income - and to disallow that apportioned amount under section 14A. The Tribunal found no reason to depart from the approach adopted by the Commissioner (Appeals) and upheld the deletion of the disallowance as computed by the Assessing Officer under rule 8D while directing computation on the reasonable basis indicated by the Commissioner (Appeals). [Paras 12, 13, 14]Disallowance computed under rule 8D cannot be made for AY 2007-08; the Commissioner (Appeals)'s approach to determine a reasonable apportionment of expenditure for the purpose of section 14A is upheld and the AO is directed to determine the quantum accordingly.Final Conclusion: Revenue's appeal is partly allowed: the disallowance under section 40(a)(ia) in respect of transaction charges is sustained, V-SAT charges are allowed as not requiring TDS, and the section 14A disallowance based on rule 8D for AY 2007-08 is set aside with directions to compute any disallowance on the reasonable basis adopted by the Commissioner (Appeals). Issues Involved:1. Disallowance under section 40(a)(ia) for VSAT charges and transaction charges.2. Deletion of addition under section 14A read with Rule 8D by the Assessing Officer.Issue-wise Detailed Analysis:1. Disallowance under section 40(a)(ia) for VSAT charges and transaction charges:The Revenue challenged the deletion of disallowance of Rs. 3,00,009 under section 40(a)(ia) concerning VSAT charges and transaction charges paid to the stock exchange. The Assessing Officer (AO) argued that these charges were for professional and technical services, necessitating TDS deduction under section 194J. The assessee contended that no TDS was required as these charges did not constitute professional or technical services, citing the Tribunal's decision in Kotak Securities Ltd. The AO, however, disallowed the payment, asserting that the Tribunal's decision was under appeal in the High Court.Both parties acknowledged that the disallowance of Rs. 2,90,009 for transaction charges was upheld by the Jurisdictional High Court in Kotak Securities Ltd. However, the assessee referenced another High Court decision in The Stock and Bond Trading Company, which ruled that transaction charges were not covered under section 194J. The Tribunal held that the later decision in Kotak Securities Ltd. was binding, thus affirming the AO's disallowance under section 40(a)(ia) for transaction charges.Regarding the Rs. 1,10,000 VSAT charges, the Tribunal noted that the Jurisdictional High Court in Angel Capital and Debit Market Ltd. had ruled that VSAT charges were not technical services, thus no TDS was required. Consequently, the Tribunal held that no disallowance under section 40(a)(ia) was warranted for VSAT charges.The assessee's alternative plea was that all payments were made by 31st March 2007, and thus, no disallowance under section 40(a)(ia) should be made, referencing the Allahabad High Court decision in Vector Shipping Services Pvt. Ltd. The Tribunal, however, noted that this decision did not constitute the ratio decidendi on the issue of 'paid' versus 'payable' and was merely obiter dicta. The Tribunal preferred the more detailed judgments of the Calcutta High Court in Crescent Exports Syndicate and the Gujarat High Court in Sikandarkhan N. Tunvar, which overruled the Special Bench decision in Merilyn Shipping & Transports. Thus, the Tribunal partially allowed the Revenue's ground, affirming the disallowance for transaction charges but not for VSAT charges.2. Deletion of addition under section 14A read with Rule 8D by the Assessing Officer:The AO disallowed Rs. 4,41,221 under section 14A, applying Rule 8D, against the assessee's dividend income of Rs. 4,76,670. The Commissioner (Appeals) held that Rule 8D was not applicable for the assessment year 2007-08, as established by the Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. The Commissioner provided a reasonable basis for determining the disallowance, proportionate to the total expenditure and the value of transactions yielding exempt income.The Tribunal found no reason to deviate from the Commissioner (Appeals)'s findings, affirming that disallowance under Rule 8D could not be applied for the assessment year 2007-08. Thus, the Tribunal dismissed the Revenue's ground on this issue.Conclusion:The Tribunal's order resulted in a partial allowance of the Revenue's appeal, affirming the disallowance of transaction charges under section 40(a)(ia) but rejecting the disallowance of VSAT charges. Additionally, the Tribunal upheld the deletion of the disallowance under section 14A read with Rule 8D for the assessment year 2007-08. The order was pronounced in open Court on 22.8.2014.