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TMI Blog2024 (11) TMI 892X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT(A) was right in ignoring the facts that the deposits received by the assessee from the investors created an obligation on the assessee and the same is covered by the definition of the interest u/s 2(28) of the Income Tax. 4. The brief facts are that Assessee Company was acting as a broker in financial markets to facilitate its clients in placing trades and transaction with National Spot Exchange Ltd. (NSEL). All the transactions were in the nature of purchase / sale of commodities between the clients and NSEL. In respect of the transactions, the profits generated by the clients were considered as paired income from investment in the nature of business income and assessee only gets its brokerage. 5. The issue under consideration before us is, whether assessee was liable to deduct TDS on the profits earned from the commodity transactions which are earned by the clients by treating it to be interest income. At the outset, it would be relevant to discuss the functioning of NSEL to understand the issues which has been discussed by the ld. AO and ld. CIT (A). 6. The National Spot Exchange Limited ( NSEL ) commenced trading in Commodities in and around October, 2008 and they permit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and he passed the order dated 20/03/2020 treating the assessee as an 'assessee in default' on account of non deduction of TDS amounting to Rs. 7,83,45.558/-. 8. AO in his order has further observed that investigation carried out by the various agencies showed that the transaction undertaken by the assessee on account of purchase and sale of commodity was in fact a financing transaction and the profit generated in the transaction was in the nature of interest paid by the assessee to the beneficiaries. The ld. A.O. observed that in the entire scheme, the sellers of the commodity would take the commodity to the NSEL's warehouse who would issue a Warehouse Receipt after examining the nature of goods. Thereafter, the sellers would go to the Exchange and spot sell the said Warehouse Receipt to the buyer. Simultaneously, the same seller, who had the buy position on the trade date will have to place buy order on the same date with the delivery date to be at T+25 cycle thereby squaring off the deal. This way the initial buyer would get a guaranteed return and the seller would get short time finance at interest for a period of around 25 days. 9. According to the ld. AO assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He therefore held that the fixed returns given to the investors by the assessee company was nothing but interest payment within the meaning of s. 2(28A) of the Act on which TDS u/s. 194A of the Act should have been deducted. The assessee was accordingly held to be an 'assessee in default' u/s. 201(1) of the Act for an amount of TDS of Rs. 7,83,45,558. 12. In the first appeal before the ld. CIT(A), first of all, referred to the order of Hon'ble Supreme Court in a case pertaining to amalgamation of 63 Moons Technologies Ltd. and NSEL in Civil Appeal No. 4476 of 2019 wherein, vide order dated 30.04.2019, the Hon'ble Supreme Court held that such paired contracts executed on the NSEL platform were financing transaction which were distinct from sale and purchase transaction in commodities. The Ld. CIT (A) also referred to the judgements of Hon'ble Supreme Court in the case of State of Maharashtra v 63 Moons Technologies Ltd. in Civil Appeal No. 2743-49 of 2022 dated 22.4.2022 wherein also the Hon'ble Court held that the NSEL represented to the investors that on receiving money and commodities, the members would receive assured returns and the services. Based on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decisions of the Hon'ble Supreme Court, it is NSEL which has offered assured returns schemes and had run exchange accordingly. The appellant being a broker of such an exchange cannot be fastened with the liability u/s. 194A, as the trade contracts are between the Investor and exchange and the appellant is a facilitator for the same. 18. Fortunately, the views of SEBI, the market regulator, are readily available in this regard. Vide order dated 25.02.2019/SEBI had passed an adverse order against the appellant and held that it was not a fit and proper person to hold, directly or Indirectly, the certificate of registration as commodity derivatives broker. The complicity of the appellant in the NSEL Scam was also discussed therein. This order of SEBI was however set aside by the Hon'ble Securities Appellate Tribunal vide order dated 09.08.2022 in Appeal No. 214 of 2019. The matter was remitted back to be decided afresh. 19. Thereafter, SEBI, vide order no. WTM/AB/MIRSD/MIRSD1/21641/2022-23 dated 29.11.2022, rejected the application of the appellant seeking registration and also debarred it from making an application for 6 months. Some of the findings of the SEBI are very rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y MCA. 35. This essentially leads to the question as to whether the Notice while facilitating such transactions for its clients was under the bona fide belief that the paired contracts' were actually spot contracts in commodities. Or can it be said that the very fact that 'paired contracts were offered meant that NSEL, was offering contracts which were not resulting in compulsory delivery and, therefore, the Notice should have been aware that such a product was far removed from the spot trading which was permitted on NSEL's platform. Further, as stated in the table reproduced at page 14 above, NSEL Itself was advertising such contracts as an alternative to fixed deposits and the return offered was 16% across all commodities irrespective of the nature of the contract or the duration, Further, these contracts were structured in a manner which ensured that the buyer always made pre-determined profits. 36. What is also undisputed is that there was a settlement default at NSEL and unsuspecting clients of the Notices suffered losses. The question that needs to be considered is whether there were enough red flags which should have alerted the Notice when these products were fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mably driven by its desire to earn brokerage, provided a platform for its clients to access a product which raised serious questions on the ability of the Noticee to conduct proper and effective due diligence regarding the product itself. In view of the above, I hold that the Notices does not satisfy the 'fit and proper parson' criteria specified in Schedule II of the Intermediaries Regulations, 20. Although SEBI has found fault with the appellant, the primary responsibility appears to have been laid on NSEL. While the appellant has failed to be careful in offering such a product to its clients, SEBI has concluded in para 46 that the appellant has presumably done so with a desire to earn brokerage. This finding of SEBI and the orders of the Hon'ble Supreme Court are convincing enough for me to conclude that it was NSEL which had offered such paired contracts and advertised the same as an assured return product. While the appellant has facilitated the same and cannot be held as blemish-free, it cannot be held liable to deduct TDS u/s. 194A as it was a facilitator and not the counter-party to the transaction. 21. Accordingly, it is held that the appellant was not required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an intermediary on behalf of the clients and executing trade on the exchange as per the rules framed by the exchange. (iii) The clause 7 deals with the provisions pertaining to 'Clearing house of the Exchange'. It is provided in clause 7.9.1 that in respect of commodities or price indices traded and cleared by the exchange in the manner specified in the bye-laws, the exchange shall be deemed to guarantee the net outstanding financial obligations to the clearing members. Thus, the net liability towards the clients on account of the transaction undertaken on the exchange portal was that of the NSEL and not of the assessee. This also proves that the assessee was not a counter party to the transaction. (iv) The clause 9 of the bye-laws deals with the 'Clearing and Settlement' procedure pertaining to the transaction on the exchange. The assessee refers to clause 9.5 which states that an order to buy or sell will become matched transaction only when it is matched in the trading system. It is further provided in clause 9.6 that 'once a trade is matched and marked to market by the Clearing House, the Exchange shall be substituted as the counter-party for all the net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever a counter-party to the transaction and it was only acting as an agent and intermediary between the client and the exchange. For ready reference our attention was drawn on enquiry report dated 11/04/2017 issued by SEBI in the case of the assessee and which has been incorporated at page 18 of the assessment order u/s. 201 and the findings and the observations in the enquiry report relied upon by the ld. AO, also goes to prove that assessee was admittedly acting as an intermediary for and on behalf of the clients. Even reliance placed by the ld. AO on the judgment of Hon ble Bombay High Court in the Criminal bail application No.1263 of 2014 in the matter of Jignesh Prakash Shah vs. The State of Maharashtra from where ld. AO observed that the paired contracts were actually finance transaction where the Investors and the buyers got fixed assured returns and the borrowers got easy short-term finance without providing any security. The said observations made by the Ld. A.O. from the order of the Hon'ble High Court clearly proves that the assessee was never a counter-party to the transaction and that the transaction, according to the Ld. A.O., was between the buyer and the seller. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of custody of the commodity, the exchange had to provide various services and, therefore, such acceptance of the commodity even for custodial purpose would amount to acceptance of deposits. The Hon'ble Supreme Court, at para 58 of its judgement, also held that the Hon'ble High Court had lost sight of the fact that the s. 2(c) of the MPID Act defines the term deposit in the broad terms. It was also held at Para 58 of the judgment that the clause 10.8 of the bye-laws indicates that NSEL was not an intermediary but counter party. Thus, from these observations of the Hon ble Supreme Court, the ld. Counsel pointed out that according to Hon ble Supreme Court also NSEL was the custodial of the commodity and was acting as one of the counter party. Whence NSEL was the custodian of the commodity and even if it was a finance transaction then it was between NSEL and clients and assessee as a broker was not custodial of the deposits and hence there is no finance transaction qua the assessee and the client. Ergo, we agree with the contention of the ld. Counsel and also as discussed above, assessee was merely a broker and an intermediary and it was never a counter party to the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 23. In Cross Objection assessee has challenged the finding of the ld. CIT(A) stating that he has erred in law and on facts in confirming the transaction undertaken by the NSEL. However, we have already held that assessee was not offered to deduct TDS u/s. 194A, therefore, we are not going to the issue whether the transactions undertaken by the NSEL was whether financial transactions or not and therefore, it is treated as academic. Accordingly, the cross objections raised by the assessee are treated as infructous. 24. Since appeal for the A.Y.2014-15 is based exactly on similar facts and finding of the AO and ld. CIT (A), therefore, our finding given herein for the appeal for A.Y.2013-14 will apply mutatis mutandis. Accordingly, Revenue s appeal as well as cross objections raised by the assessee are dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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