2009 (12) TMI 498 - AT - Income Tax

Deduction of tax at source - Fees for professional or technical services - Whether therefore, payment in question could not be considered as fee for technical services rendered so as to attract provisions of section 194J

Summary

Issues Involved:
1. Whether the payments made by the assessee to the stock exchanges for VSAT charges, lease line charges, BOLT charges, and Demat charges qualify as fees for technical services under section 194J of the Income-tax Act.
2. Whether the assessee was required to deduct tax at source on these payments under section 194J.
3. Whether the disallowance of these payments under section 40(a)(ia) for non-deduction of tax at source was justified.

Issue-wise Detailed Analysis:

1. Nature of Payments (VSAT, Lease Line, BOLT, Demat Charges):
The assessee, a stock broking company, paid various charges to the stock exchanges, including VSAT charges, lease line charges, BOLT charges, and Demat charges. The Assessing Officer (AO) considered these payments as fees for technical services, necessitating tax deduction at source under section 194J. The AO argued that these services were specialized and not available to the general public, thus qualifying as technical services.

2. Requirement to Deduct Tax at Source:
The AO disallowed the deduction of these payments under section 40(a)(ia) due to the assessee's failure to deduct tax at source, as mandated under section 194J. The AO's rationale was that the payments were for technical services, which required tax deduction at source. The AO distinguished the case from the Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53 (Madras High Court), which held that payments for standard facilities do not constitute fees for technical services.

3. CIT(A)'s Ruling:
On appeal, the CIT(A) followed a precedent set in the case of Kotak Securities Ltd., concluding that the charges were for the use of infrastructure facilities rather than technical services. The CIT(A) emphasized that the stock exchanges provide a satellite-based communication network for trading, and the charges were merely reimbursements for infrastructure use. Thus, the provisions of section 194J were deemed inapplicable, and no disallowance under section 40(a)(ia) was warranted.

4. Tribunal's Analysis:
The Tribunal examined the nature of the payments and the relevant legal provisions. It referred to section 194J and Explanation 2 to section 9(1)(vii), which defines "fees for technical services" as consideration for managerial, technical, or consultancy services. The Tribunal noted that the term "technical service" should be understood in context and does not encompass every service involving technology.

The Tribunal cited the Madras High Court's decision in Skycell Communications Ltd., which clarified that payments for using standard facilities, even if technologically advanced, do not constitute fees for technical services. The Tribunal agreed that the stock exchanges provide infrastructure facilities (VSAT, lease line, BOLT, Demat) for trading, and the charges are for using these facilities, not for technical services.

5. Conclusion:
The Tribunal concluded that the charges paid by the assessee to the stock exchanges were not fees for technical services. Therefore, the provisions of section 194J were not applicable, and the assessee was not required to deduct tax at source on these payments. Consequently, the disallowance under section 40(a)(ia) was not justified. The Tribunal confirmed the CIT(A)'s order and dismissed the Revenue's appeal.

Summary:
The Tribunal held that the payments made by the assessee to the stock exchanges for VSAT charges, lease line charges, BOLT charges, and Demat charges were not fees for technical services under section 194J. Therefore, the assessee was not required to deduct tax at source on these payments, and the disallowance under section 40(a)(ia) was not warranted. The Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal.