TaxTMI 
TaxTMI 
2018 (5) TMI 1586
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....tion of tax at source on borrowing fee paid through National Securities Clearing Corporation Ltd. (in short "NSCCL"). 5. Brief facts are,the assessee a company is stated to be engaged in the business of capital market broker and other activities related to securities business.To verify assessee's compliance to the provisions relating to deduction of tax at source a survey under section 133A of the Act was carried out on the assessee on 22nd July 2011,. On the basis of discrepancies found relating to non-deduction of tax at source, the Assessing Officer initiated proceedings under section 201(1) of the Act. It was noticed that in the financial year 2011-12, the assessee, though, had debited an amount of Rs. 7,23,21,065 under the head finance cost, however, it has not deducted tax at source on such payment. When the assessee was called upon to explain the reasons for non-deduction of tax at source on such payments made, it was submitted that the said amount was paid to NSCCL under Securities Lending and Borrowing Scheme, 1997 (SLB) of Securities Exchange Board of India (SEBI) for enabling to settle short selling of securities. It was submitted, to participate in SLB scheme both lend....
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....unt of debt incurred in borrowing the securities for short selling in capital market, it will come within the definition of interest as provided under section 2(28A) of the Act. Thus, on the basis of aforesaid reasonings, the Assessing Officer held the assessee as an assessee in default and raised demand of Rs. 72,32,106 under section 201(1) of the Act and levied interest thereupon under section 201(1A) of the Act amounting to Rs. 22,41,952, aggregating to Rs. 94,74,058. Being aggrieved of the order passed under section 201(1) / 201(1A) of the Act, assessee preferred an appeal before the first appellate authority. 6. Before the learned Commissioner (Appeals) assessee contested the demand raised with elaborate submissions. The learned Commissioner (Appeals) after considering the submissions of the assesseeagreed that even though the borrowing fee was paid to NSCCL under the SLB scheme, however, status of NSCCL is just of a intermediary and facilitator for the transaction resulting in lending of shares and also that of an agent to ensure payment of lending fee to the lender. The learned Commissioner (Appeals) observed, the assessee is paying the borrowing fee to NSCCL which in turn ....
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....the custodian of the borrowing fee on behalf of the lenders of securities, the payment made to NSCCL cannot be regarded as income of NSCCL. He submitted, NSCCL has also clarified the aforesaid factual position by stating that the amount received as borrowing fee is shown as liability in its books of account. The learned Sr. Counsel drawing our attention to section 194A of the Act submitted that the provision requires the payment made to be in the nature of income in the hands of the recipient. Thus, as per the provisions of section 194A of the Act the borrowing cost paid by the assessee to NSCCL is not an income of NSCCL but income of the lenders. However, since the assessee is not aware of the identity of the recipient, it cannot deduct tax at source on such payment. Referring to the provisions of sub-section (3) of section 200 of the Act, the learned Sr. Counsel submitted that as per the said provision, the person deducting tax at source has to pay the TDS to the credit of the Central Government within the prescribed time and after making such payment shall furnish a statement in the prescribed manner before the prescribed authority setting forth the particulars of payment made a....
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....ayment of borrowing fee by the assessee whichis the subject matter of the present appeal. The learned Commissioner (Appeals) in Para-4 and 4.1 of the impugned order has explained in detail the technicalities and nuances of the transaction of lending and borrowing of securities under the SLB Scheme. Therefore, there is no necessity to deal with them in detail in this order. To put it simply, SEBI has formulated the Securities Lending Scheme, 1997 for lending and borrowing of securities through an approved intermediary. As per the definition of Scheme, as provided under SLB Scheme 1997, it involves lending of securities through an approved intermediary to a borrower under an agreement for specified period with the condition that the borrower will return equivalent securities of the same type or class at the end of the specified period along with the corporate benefit accruing on the securities borrowed. As per clause (3)(1)(e) of the Scheme, lender means a person who deposits the securities registered in his name or in the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the Scheme. Borrower, as per clause 3(1)(c) o....
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....assessee to deduction tax at source under section 194A of the Act. However, the dispute does not end there. It is a fact on record, the ultimate beneficiary of the borrowing fee paid by the assessee is the lenders of the securities borrowed by the assessee through the approved intermediary. In other words, the borrowing fee paid by the assessee was ultimately received by the respective lenders of securities and NSCCL has only acted as a pass through entity. Thus, in effect, the borrowing fee paid by the assessee is to be treated as income of the lenders of securities borrowed by the assessee. The issue which arises for consideration before us is, whether the assessee can be held to be an assessee in default for not deducting tax at source under section 194A of the Act in respect of borrowing fee paid to the lenders through NSCCL. In this regard, it is the contention of the assessee from the very beginning that since the identity of the lenders are not known to the assessee it could not have deducted tax at source while making such payment. Thus, the TDS provisions become unworkable. However, though, the Assessing Officer has not at all dealt with the aforesaid contention of the ass....