2012 (11) TMI 277 - AT - Income Tax

Transaction charges paid to the stock exchanges - fees for technical services TDS u/s 194J Following the decision of court in case of Commissioner of Income-tax - 4(3) Versus Kotak Securities Ltd. 2011 (10) TMI 24 - BOMBAY HIGH COURT Held that - 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. As regard quantification of interest, matter is restored back to the Assessing Officer, who will carry out necessary verification and quantify the interest. Thus, ground of appeal raised by the department stands allowed, subject to quantification of interest - In the result, appeal for assessment years 2005-06, 2006-07, 2007-08 & 2008-09 stands allowed subject to verification and quantification of interest by the Assessing Officer.

Summary

Issues:
Appeals filed by the department against the order passed under Section 201(1)/201(1A) for assessment years 2005-2006, 2006-2007, 2007-2008, and 2008-2009 regarding the tax deductibility of transaction charges fees paid to stock exchanges.

Analysis:
The appeals involved common issues related to the tax deductibility of transaction charges fees paid to stock exchanges by the assessee. The CIT(A) had initially held that the tax was not deductible at source under Section 194J of the Income Tax Act for the transaction charges paid to the Bombay Stock Exchange, National Stock Exchange, and IL & FS. The assessee relied on the decision of ITAT Mumbai Bench in the case of Kotak Securities Limited, arguing that the transaction fees were not for technical services and hence not liable for TDS. However, the Assessing Officer did not consider this submission and levied interest under Section 201(1)/201(1A) of the Act.

The CIT(A) found that the issue was covered by the decision of the Tribunal in the case of Kotak Securities Limited, where it was held that no TDS was liable to be deducted by the assessee. The CIT(A) referred to the Tribunal's decision and ruled in favor of the appellant, stating that the stock exchange did not provide managerial services for which TDS was necessary.

Upon further review, it was noted that the decision of the ITAT Mumbai Bench in the Kotak Securities Limited case had been reversed by the Bombay High Court. The High Court found that the transaction charges paid by the assessee to the Stock Exchange constituted "fees for technical services" under Section 194J, making the assessee liable to deduct tax at source. The High Court highlighted the managerial services rendered by the stock exchanges through the BOLT system, managing and regulating trading activities to ensure market safety.

Consequently, following the High Court's decision, the appellate tribunal allowed the department's appeal subject to the quantification and verification of interest by the Assessing Officer. The decision applied mutatis mutandis to appeals for the assessment years 2005-06, 2006-07, 2007-08, and 2008-09, with the matter of interest quantification being referred back to the Assessing Officer for further action.