2013 (7) TMI 259 - AT - Income Tax

Non deduction of tax at source u/s.194J on VSAT charges, transaction charges and lease line charges, paid to the National Stock Exchange (NSE) - Held that - It is inconceivable that the stock exchanges are not filing their returns of income or not disclosing the impugned sums in their accounts, which are in fact for most part transmitted by them to the entities providing the corresponding services, i.e., the service providers. The payment thereto is thus by the respective stock exchange, and which in turn stands reimbursed in its respect by its individual members, as it is for their ultimate benefit that the services stand availed of or secured by the Exchanges. This also forms the reason for approving non-deduction of tax at source on the payment of lease line and VSAT charges by them to the stock exchanges. The Revenue has not been able to rebut the assessee s claim that the current year is the first year for which such action has been taken by the Revenue in its case so that the assessee was only acting as it had been in the past, over which s. 194J has been on the statute. Grounds for the invocation of the doctrine of legitimate expectation thus exist. Surely, going by the said decision, s. 194J does not get any more legitimacy on the co-option of sec. 40(a)(ia) on the statute. At the same time, without doubt, a continued stand by the assessee for a subsequent year/s would however imply that it has chosen to contest the Revenue s stand, and which can therefore only be at its own peril, so that it could not be allowed any benefit of doubt in view of non-action by the Revenue despite the provision of s.194J being on the statute for over a decade, the scope of which and, consequently, that of s.40(a)(ia), gets resolved per the said decision, and which is though applicable from an anterior date, i.e., AY 2005-06. As such following the ratio of the decision in the case of Kotak Securities Ltd. (2011 (10) TMI 24 - Bombay High Court) disallowance u/s.40(a)(ia) for the current year would not obtain in the assessee s case. In favour of assessee.

Summary

Issues:
Exigibility to deduction of tax at source u/s.194J on various charges paid by the assessee to the National Stock Exchange and the validity of the disallowance u/s.40(a)(ia).

Analysis:
The appeal revolves around the question of whether the assessee was required to deduct tax at source u/s.194J on charges paid to the National Stock Exchange and the consequent validity of the disallowance u/s.40(a)(ia). The Assessing Officer disallowed the expenses as tax was not deducted at source, considering the payments as 'fees for technical services'. However, the CIT(A) deleted the disallowance based on precedents like Skycell Communication Ltd. and Tribunal decisions. The Revenue, aggrieved by this, appealed.

The debate in the case centered on the interpretation of section 194J and section 40(a)(ia) of the Income Tax Act. The Revenue relied on the decision in CIT v. Kotak Securities Ltd., asserting that expenses were liable for tax deduction u/s.194J. On the contrary, the assessee argued that the Kotak Securities Ltd. decision only applied to transaction charges, not lease line and VSAT charges. The assessee contended that the provision should be liberally construed for the first year, i.e., A.Y. 2005-06, as the Revenue had not invoked it earlier.

The Tribunal analyzed the concept of the 'first year' concerning the application of sec. 40(a)(ia). It highlighted that each assessment year is an independent unit governed by the law as on the first day of that year. The Tribunal considered the Kotak Securities Ltd. decision and the historical view favoring non-deduction of tax on such payments before that judgment. It emphasized that no circular had informed assessees about the tax liability on these payments, and the provision aimed at ensuring tax compliance by payees.

Moreover, the Tribunal raised a critical question regarding the validity of shifting the tax burden through sec. 40(a)(ia) when tax recovery gets suspended upon the payee's payment of due taxes. It discussed the legislative intent behind the provision and the subsequent amendments addressing its anomalies. The Tribunal ultimately dismissed the Revenue's appeal, considering the assessee's legitimate expectation and the historical context of tax deduction on the payments in question.

In conclusion, the Tribunal's decision was based on a comprehensive analysis of the legal provisions, historical perspectives, and the legislative intent behind sec. 40(a)(ia). The judgment emphasized the importance of considering the specific circumstances of each case and the evolving interpretations of tax laws in determining the applicability of tax deduction at source requirements.