2024 (11) TMI 892 - AT - Income Tax

TDS u/s 194A - Demand u/s. 201(1) r.w.s. 201(1A) - TDS on profits earned from commodity transactions treated as interest income - Forward Market Commission directed NSEL to stop launching contracts after the payment default and this led to the closure of NSEL in July 2013 - As per the findings of the Investigation agencies, the brokers had sold the commodities on the floor of National Spot Exchange to the clients by assuring them fixed returns and transactions on the exchange were carried out in the guise of commodity trading without ensuring delivery of the commodity traded on the exchange HELD THAT - As borne out from the records and also from the finding of the lower authorities that assessee was acting as a broker and intermediary as the entire set of transactions carried out by the assessee was on behalf of the client of NSEL platform. The assessee had undertaken the transactions only to earn brokerage and such income from brokerage have duly been offered to tax. Section 194 is attracted when a person is responsible for payment of interest other than income by way of income and securities. However, in the case of the assessee, assessee being a broker of certain exchange cannot be held to be a person who has been paying any interest to the clients and therefore, we hold that provision of Section 194A cannot be invoked in the case of the assessee because it cannot be reckoned as a person responsible for payment of income by way of interest to the clients. Ld. Counsel has referred few judgments of CIT vs. Hardarshan Singh 2013 (1) TMI 314 - DELHI HIGH COURT and CIT vs. Cargo Linkers 2008 (3) TMI 619 - DELHI HIGH COURT wherein as held that provision of TDS cannot be applied in case of intermediary / agents acted on behalf of its clients and intermediary cannot be held to be person responsible for the purpose of TDS provisions. Though these decisions have been rendered in the case of CNF agents, however, the same principle will apply in the present case also because assessee was also an intermediary between the clients and the NSEL and was never party to any counter party members. CIT(A) has referred to SEBI order dated 29/11/2022 and in that order SEBI in para 28 held that the primary responsibility was on NSEL and not the brokers. In short there was and adequate collateral to secure the sale orders posted on its platform. The entire responsibility has been put on to the exchange and not of the brokers facilitating these transactions. Thus, the order of the ld. CIT (A) holding that assessee is not required to deduct TDS u/s. 194A is upheld and consequently, the grounds raised by the Revenue are dismissed.

Summary

Issues Involved:

1. Whether the delay in filing the appeal by the Revenue should be condoned.
2. Whether the assessee was liable to deduct TDS on profits earned from commodity transactions treated as interest income.
3. Whether the assessee acted as a broker or was a counterparty in the transactions on the NSEL platform.
4. Whether the transactions on the NSEL platform were financial transactions or commodity trades.

Detailed Analysis:

1. Delay in Filing the Appeal:

The appeal filed by the Revenue was delayed by 22 days. After hearing both parties, the Tribunal found reasonable grounds for the delay and condoned it, allowing the appeal to proceed.

2. Liability to Deduct TDS:

The core issue was whether the assessee was liable to deduct TDS on profits from commodity transactions, which were considered interest income. The AO held that the transactions were financial in nature, and the profits were akin to interest payments, thus requiring TDS deduction under Section 194A. However, the CIT(A) concluded that the assessee, acting as a broker, was not responsible for the clients' income and was not liable to deduct TDS. The Tribunal upheld this view, emphasizing that the assessee was merely a facilitator and not a counterparty, thus not responsible for TDS under Section 194A.

3. Role of the Assessee: Broker or Counterparty:

The Tribunal examined the role of the assessee, who facilitated transactions on the NSEL platform. The assessee argued that it acted solely as a broker, earning brokerage income, and was not a counterparty to the transactions. The Tribunal agreed, citing clauses from the NSEL bye-laws that defined the assessee's role as an intermediary. The Tribunal noted that the exchange, NSEL, was responsible for guaranteeing financial obligations, further supporting the assessee's position as a broker and not a counterparty.

4. Nature of Transactions on NSEL Platform:

The Tribunal reviewed whether transactions on the NSEL platform were financial transactions or genuine commodity trades. The AO and various regulatory findings suggested that these were financing transactions disguised as commodity trades. The CIT(A), while acknowledging these findings, focused on the responsibility of NSEL in offering paired contracts with assured returns. The Tribunal, agreeing with the CIT(A), noted that the primary responsibility for these transactions rested with NSEL, not the assessee. The Tribunal also referenced SEBI's findings, which highlighted the role of NSEL in structuring these transactions as financial products, further absolving the assessee of liability for TDS deduction.

Conclusion:

The Tribunal dismissed the appeals filed by the Revenue and the cross-objections by the assessee. It upheld the CIT(A)'s decision that the assessee was not required to deduct TDS under Section 194A, as the assessee acted as a broker and not a counterparty in the transactions. The Tribunal also noted that the primary responsibility for the nature of the transactions lay with NSEL, not the brokers.