TMI Blog2011 (10) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... ress the first five 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. CIT reported in [2010] 327 ITR 323 (SC) and T.R.F. Ltd. v. 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 'interveners'. 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 pub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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 exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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. DCIT reported in 251 ITR 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 question before the Madras High Court was, whether the amount p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 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 sy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ettlement 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 exch ..... X X X X Extracts X X X X X X X X Extracts X X X X
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