2010 (7) TMI 720 - AT - Income Tax

Applicability of 194J on leaseline charges and VSAT charges Held that -Reimbursement of the expenses incurred by the Stock Exchange in lieu of infrastructure and trading facilities provided by the Exchange to the Members, will not be liable for tax deduction under Section 194J.The transaction charges paid by a Member to the Stock Exchange on the basis of the volume of transactions is a payment for the use of the facilities provided by the Stock Exchange and not for any services, either technical or managerial, and therefore the provisions of section 194J and consequently section 40(a)(ia) are not attracted. In case of CIT vs Bharti Cellular 2008 -TMI - 75309 - DELHI HIGH COURT went on to observe that the expression technical services would have reference to only technical services rendered by a human being but would not include any services provided by machines or robots. Applicability of 194C -Agreement of Jobbers and assessee was that of co-sharers of profit-Held That -Were separate joint ventures entered into by the assessee and agreement between Jobbers and assessee is on principal to principal basis and in these circumstances the provisions of section 194C are not attracted because in essence and substance the amounts paid to the jobbers or arbitragers did not in reality represent the expense of the assessee company but represented payment of the share of the jobbers / arbitragers under the agreement entered into with them. In such a case the assessee is right in saying that there was no question of deducting any tax at source.

Issues Involved:
1. Disallowance of expenses under Section 40(a)(ia) for non-deduction of tax on payments to Stock Exchange.
2. Applicability of Section 194C for payments made to jobbers/arbitragers.

Issue-wise Detailed Analysis:

1. Disallowance of expenses under Section 40(a)(ia) for non-deduction of tax on payments to Stock Exchange:

The appeal by the Revenue concerns the assessment year 2005-06, where the assessee, a Private Limited Company engaged in broking and trading in shares and securities, faced disallowance of Rs.28,69,560/- under Section 40(a)(ia) of the Income Tax Act, 1961. The disallowed amount comprised ISDN/Leaseline charges, Stock Exchange expenses, Transaction charges, and VSAT charges paid to the Stock Exchange. The Assessing Officer (AO) deemed these payments as fees for technical services under Section 194J, necessitating tax deduction at source, which the assessee failed to do.

On appeal, the CIT(A) held that the leaseline and VSAT charges were reimbursements for infrastructure and trading facilities provided by the Stock Exchange, and thus did not qualify as fees for technical services under Section 194J. For the other expenses, following the Mumbai Bench of the Tribunal in Kotak Securities Ltd. vs. Additional CIT, it was determined that the Stock Exchange did not provide managerial or technical services. Consequently, no tax was deductible, and Section 40(a)(ia) was not applicable, leading to the deletion of the disallowance.

The Revenue's appeal reiterated that the payments were fees for technical services. However, the Tribunal, relying on its earlier decision and judgments from the Madras High Court (Skycell Communications Ltd. vs. DCIT) and Delhi High Court (CIT vs. Bharti Cellular Ltd.), upheld the CIT(A)'s decision. It was emphasized that technical services under Section 194J require human intervention, which was not the case here. Thus, the Tribunal dismissed the Revenue's grounds, affirming that the expenses did not attract Section 40(a)(ia).

2. Applicability of Section 194C for payments made to jobbers/arbitragers:

The AO noted payments of Rs.1,42,24,997/- to jobbers and Rs.19,46,576/- to arbitragers, asserting that tax should have been deducted under Section 194C, which deals with payments to contractors for carrying out work. The AO disallowed these payments under Section 40(a)(ia) for non-deduction of tax.

The assessee contended that these payments were part of a joint venture with jobbers/arbitragers, sharing profits and losses equally. The CIT(A), after reviewing the agreements and returns filed by the jobbers, concluded that the relationship was on a principal-to-principal basis, not contractor-subcontractor. The jobbers acted independently, trading on their own account, and profits or losses were shared per the agreements. Thus, Section 194C was deemed inapplicable, and the disallowance was deleted.

The Revenue's appeal maintained the AO's stance. However, the Tribunal, after examining the agreements and accounts, found that the payments were part of joint ventures, not contractor payments. The jobbers/arbitragers traded independently, and the assessee's share of profits was accounted for, not the gross payments. Therefore, Section 194C did not apply, and no tax deduction was required. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's grounds.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming that the expenses related to Stock Exchange payments did not attract Section 40(a)(ia) and the payments to jobbers/arbitragers did not fall under Section 194C. The decision was pronounced in the Open Court on 16th July 2010.

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