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TMI Blog2011 (10) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... x 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 public issues. 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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. 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' fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvoking 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 immed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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