2013 (6) TMI 352 - AT - Income Tax

Technical services provided by the NSDL and CDSL - whether will fall under the head of Settlement and Custody Fees as professional/technical services u/s. 194J - Disallowance u/s. 40(a)(ia) for failure to deduct TDS as confirmed by AO - Held that - The judgement of Kotak Securities Ltd. (2011 (10) TMI 24 - Bombay High Court) squarely applies to the facts of the assessee s case and the assessee is availing managerial services from NSDL/CDSL for which the assessee paid the fees. Being so, the assessee is liable to deduct TDS on the payment made to the NSDL/CDSL as the assessee not deducted TDS on the impugned payment. The disallowance made by the Assessing Officer u/s 40(a)(ia) is justified. As assessee submitted that in para 32 of the Bombay High Court judgement cited supra, it was held that since both Revenue and assessee are in bona-fide belief for merely a decade that tax is not deductible at source on payments on transaction charges, no fault can be found with the assessee in not deduction tax at source in the assessment year under consideration and consequently disallowance made by the AO u/s. 40(a)(ia) in respect of transaction charges cannot be sustained. This finding of the Hon ble High Court in that case is on the basis of peculiar facts of that case. In the case at hand, those peculiar facts are missing. Being Revenue appeal allowed.

Issues Involved:
1. Classification of "Settlement and Custody Fees" under professional/technical services as per Section 194J.
2. Disallowance under Section 40(a)(ia) for failure to deduct TDS on professional/technical services.
3. Applicability of Section 194J to payments made to NSDL/CDSL.

Issue-wise Detailed Analysis:

1. Classification of "Settlement and Custody Fees" under professional/technical services as per Section 194J:

The primary issue revolves around whether the "Settlement and Custody Fees" paid to NSDL and CDSL should be classified as professional or technical services under Section 194J of the Income Tax Act, which would necessitate the deduction of TDS.

The Revenue contended that the services provided by NSDL and CDSL, such as dematerialisation, rematerialisation, electronic settlement of trades, and other related services, qualify as technical services. Therefore, payments made for these services should attract TDS under Section 194J. The Revenue cited the Bombay High Court's judgment in CIT v. Kotak Securities Ltd. to support their argument, asserting that the services provided by NSDL and CDSL involve technical expertise and managerial oversight.

Conversely, the assessee argued that the fees paid to NSDL and CDSL are merely for accessing the data and do not involve any professional or technical services. The assessee emphasized that NSDL and CDSL provide access to their database for downloading data, which does not require intellectual or manual skills. The assessee relied on the Madras High Court judgment in Skycell Communications Ltd. & Anr. vs. DCIT, which held that providing cellular mobile telephone services does not constitute technical services under Section 194J.

2. Disallowance under Section 40(a)(ia) for failure to deduct TDS on professional/technical services:

The Assessing Officer (AO) disallowed the amount of Rs. 1,39,78,121 under Section 40(a)(ia) of the Act, as the assessee failed to deduct TDS on the payments made to NSDL and CDSL, which the AO classified as professional services. The AO argued that since the assessee availed professional services from NSDL and CDSL, the provisions of Section 194J were applicable, and TDS should have been deducted.

The CIT(A) disagreed with the AO's classification, stating that the payments made to NSDL and CDSL were for accessing data, not for professional or technical services. Consequently, the CIT(A) held that the disallowance under Section 40(a)(ia) was not justified and deleted the disallowance.

3. Applicability of Section 194J to payments made to NSDL/CDSL:

The Tribunal examined the nature of the services provided by NSDL and CDSL and the applicability of Section 194J. The Tribunal noted that the CIT(A) had observed that the assessee merely accessed the database for downloading data electronically and that the payments were not for professional or technical services. The Tribunal referred to the Bombay High Court's judgment in Kotak Securities Ltd., which dealt with a similar issue and held that the services provided by the stock exchange through the BOLT system constituted managerial services, thereby attracting TDS under Section 194J.

The Tribunal concluded that the facts of the assessee's case were similar to those in Kotak Securities Ltd. and that the payments made to NSDL and CDSL involved managerial services. Therefore, the provisions of Section 194J were applicable, and the assessee was liable to deduct TDS on the payments made to NSDL and CDSL. The Tribunal upheld the disallowance made by the AO under Section 40(a)(ia) for failure to deduct TDS.

Conclusion:

In conclusion, the Tribunal held that the payments made to NSDL and CDSL for "Settlement and Custody Fees" constituted managerial services under Section 194J, necessitating the deduction of TDS. The Tribunal upheld the disallowance of Rs. 1,39,78,121 made by the AO under Section 40(a)(ia) due to the assessee's failure to deduct TDS on these payments. The Revenue's appeal was allowed, and the CIT(A)'s order was overturned.

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