I-T- Whether assessee is liable to deduct tax at source on payments to be made to stock exchange as fees for rendering managerial services - YES, rules Bombay HC
MUMBAI, NOV 09, 2011: THE issue before the Bench is - Whether the assessee is liable to deduct tax at source on the payments to be made to stock exchanges as fees for rendering managerial service. And the verdict goes in favour of the Revenue.
Facts of the case
Assessee is a company engaged in the business of share broking, depositories, mobilization of deposits and marketing of public issues. Trading was carried out through various Stock Exchanges. Trading in securities were carried out under the open outcry system where the member brokers used to assemble in a trading ring for doing transaction in securities. To facilitate smooth trading, the open outcry system had been replaced by the BSE by introducing the BSE On-line Trading (BOLT) system and NSE introduced National Exchange for Automated Trading (NEAT) System. This automated screen based trading in securities, facilitates the member brokers to trade in securities from the Trader Work Stations installed in their offices instead of assembling in the trading ring. Identify of the counter-party is not revealed on the screen based BOLT system to ensure the transactions are carried out in a free and fair manner. Thus, the buyers and sellers of securities do not know the names of each other and the same is revealed only after the deal is finally settled. Trading and settlement activities of the member brokers are monitored through On-line Real Time System known as BSE on-line Surveillance system ('BOSS').
As per the bye laws framed by the BSE duly approved by SEBI, the BSE is entitled to charge its members various fees, such as, listing fees, admission fees, arbitration fees, transaction charges, etc. These charges are levied on the members who enter into transactions in securities / derivatives through the BOLT system. BOLT system is connected though VSAT and lease line connections. Under the BOLT system, members can proactively enter orders in the system which is displayed in the system till the full quantity is matched by one or more of counter orders and result into a transaction.
Assessee paid BSE Rs. 5.18 crores towards transaction charges without deducting tax at source. AO held that the transaction charges paid by the assessee were in the nature of 'fees for technical services' covered under Section 194J and since the assessee failed to deduct tax at source, in view of Section 40(a)(ia), the entire expenditure of Rs.5.17 crores was disallowed.
CIT(A) upheld the order of the AO stating that the stock exchange is not merely a mute spectator providing only physical infrastructure to the members but the stock exchange was a supervisor, overseer, manager controller, settlor and arbitrator over the security trading done through the stock exchange and provides managerial services. Thus, section 194J was applicable.
ITAT held that the stock exchange does not render any managerial service or render any technical consultancy service and, therefore, transaction charges were not covered under Section 194J and deleted the disallowance made u/s 40(a)(ia).
After hearing both the parties, the High Court held that,
++ there is direct linkage between the managerial services rendered and the transaction charges levied by the stock exchange. The BOLT system provided by the Bombay Stock Exchange is a complete platform containing the entire spectrum of trading in securities. The BOLT system not merely provides the live connection between prospective purchasers and prospective sellers of the respective securities / derivatives together with the rates at which they are willing to buy or sell the securities, but also provides a mechanism for concluding the transaction between the two parties. The BOLT system withholds the identity of the two contracting parties, namely, the buyer and the seller of the respective securities / derivatives. Under the screen based BOLT system the entire trading system is managed and monitored right from the stage of providing the platform for the prospective buyers / sellers of the securities / derivatives till the date the deal struck between the two parties are finally settled in all respects. The very object of establishing the stock exchanges is to regulate the transactions in securities and to prevent undesirable speculation in the transactions. To achieve this goal, the stock exchange continuously upgrades its BOLT system so that the transactions carried on through that system inspire confidence in the general public and that the transactions are settled smoothly and expeditiously. Thus, the entire trading in securities is managed by the Bombay Stock Exchange through the BOLT system provided by the stock exchange;
++ in the case of BOLT system, the user of the system is restricted to the trading in securities and the same is completely regulated by the stock exchange. If during the course of trading, it is found that a member is indulging in malpractices the stock exchange is empowered to suspend the member broker apart from making him liable for various other consequences;
++ if a member of the stock exchange does not enter into any transaction under the BOLT system he is not required to pay the transaction charges. It is only if the member trades through the BOLT system the member is required to pay transaction charges depending upon the volume of trading because, once the trading through the BOLT system takes place the member is assured that the other contracting party is a genuine buyer or seller as the case may be and that the price offered by the opposite party would be in consonance with the norm laid down by the stock exchange and that the transaction would be settled efficiently and expeditiously. The fact that the stock exchange levies or collects lesser transaction charges where the value of the transaction is higher, cannot be a ground to hold that no managerial services are rendered by the stock exchange, because, what should be the criteria for levying the transaction charges is left to the discretion of the stock exchange;
++ with a view to regulate the trading in securities, the stock exchange provides risk management and surveillance to the stock brokers to ensure the safety of the market. The surveillance function involves price monitoring, exposure of the members, rumour verification on a daily basis and take remedial actions like reduction of filters, imposition of special margin, transferring scrips on a trade to trade settlement basis, suspension of scrips / members, etc. These are some of the identified managerial services rendered by the stock exchange for which transaction charges are levied;
++ the in-built mechanism in the BOLT system itself is a part of the managerial service rendered by the stock exchange and even the in-built mechanism provided in the system is varied or altered by the stock exchange depending upon the circumstances encountered during the course of rendering managerial services. Therefore, the Tribunal was in error in holding that no technical or managerial services are rendered by the stock exchange by providing the BOLT system of trading in securities and the assessee was liable to deduct tax at source before crediting the transaction charges to the account of the stock exchange;
++ though Section 194J was inserted with effect from 1/7/1995, till the assessment year in question both the revenue and the assessee proceeded on the footing that Section 194J was not applicable to the payment of transaction charges and accordingly, during the period from 1995 to 2005 neither the assessee has deducted tax at source while crediting the transaction charges to the account of the stock exchange nor the revenue has raised any objection or initiated any proceedings for not deducting the tax at source. Thus, no fault can be found with the assessee in not deducting the tax at source under Section 194J of the Act and consequently, no action could be taken under Section 40 (a)(ia) of the Act. It is not the case of the revenue that on account of the failure on the part of the assessee to deduct tax at source, the revenue has suffered presumably because, the stock exchange has discharged its tax liability for the assessment year in question.
Assessee's appeal partly allowed
MUMBAI, NOV 09, 2011: THE issue before the Bench is - Whether the assessee is liable to deduct tax at source on the payments to be made to stock exchanges as fees for rendering managerial service. And the verdict goes in favour of the Revenue.
Facts of the case
Assessee is a company engaged in the business of share broking, depositories, mobilization of deposits and marketing of public issues. Trading was carried out through various Stock Exchanges. Trading in securities were carried out under the open outcry system where the member brokers used to assemble in a trading ring for doing transaction in securities. To facilitate smooth trading, the open outcry system had been replaced by the BSE by introducing the BSE On-line Trading (BOLT) system and NSE introduced National Exchange for Automated Trading (NEAT) System. This automated screen based trading in securities, facilitates the member brokers to trade in securities from the Trader Work Stations installed in their offices instead of assembling in the trading ring. Identify of the counter-party is not revealed on the screen based BOLT system to ensure the transactions are carried out in a free and fair manner. Thus, the buyers and sellers of securities do not know the names of each other and the same is revealed only after the deal is finally settled. Trading and settlement activities of the member brokers are monitored through On-line Real Time System known as BSE on-line Surveillance system ('BOSS').
As per the bye laws framed by the BSE duly approved by SEBI, the BSE is entitled to charge its members various fees, such as, listing fees, admission fees, arbitration fees, transaction charges, etc. These charges are levied on the members who enter into transactions in securities / derivatives through the BOLT system. BOLT system is connected though VSAT and lease line connections. Under the BOLT system, members can proactively enter orders in the system which is displayed in the system till the full quantity is matched by one or more of counter orders and result into a transaction.
Assessee paid BSE Rs. 5.18 crores towards transaction charges without deducting tax at source. AO held that the transaction charges paid by the assessee were in the nature of 'fees for technical services' covered under Section 194J and since the assessee failed to deduct tax at source, in view of Section 40(a)(ia), the entire expenditure of Rs.5.17 crores was disallowed.
CIT(A) upheld the order of the AO stating that the stock exchange is not merely a mute spectator providing only physical infrastructure to the members but the stock exchange was a supervisor, overseer, manager controller, settlor and arbitrator over the security trading done through the stock exchange and provides managerial services. Thus, section 194J was applicable.
ITAT held that the stock exchange does not render any managerial service or render any technical consultancy service and, therefore, transaction charges were not covered under Section 194J and deleted the disallowance made u/s 40(a)(ia).
After hearing both the parties, the High Court held that,
++ there is direct linkage between the managerial services rendered and the transaction charges levied by the stock exchange. The BOLT system provided by the Bombay Stock Exchange is a complete platform containing the entire spectrum of trading in securities. The BOLT system not merely provides the live connection between prospective purchasers and prospective sellers of the respective securities / derivatives together with the rates at which they are willing to buy or sell the securities, but also provides a mechanism for concluding the transaction between the two parties. The BOLT system withholds the identity of the two contracting parties, namely, the buyer and the seller of the respective securities / derivatives. Under the screen based BOLT system the entire trading system is managed and monitored right from the stage of providing the platform for the prospective buyers / sellers of the securities / derivatives till the date the deal struck between the two parties are finally settled in all respects. The very object of establishing the stock exchanges is to regulate the transactions in securities and to prevent undesirable speculation in the transactions. To achieve this goal, the stock exchange continuously upgrades its BOLT system so that the transactions carried on through that system inspire confidence in the general public and that the transactions are settled smoothly and expeditiously. Thus, the entire trading in securities is managed by the Bombay Stock Exchange through the BOLT system provided by the stock exchange;
++ in the case of BOLT system, the user of the system is restricted to the trading in securities and the same is completely regulated by the stock exchange. If during the course of trading, it is found that a member is indulging in malpractices the stock exchange is empowered to suspend the member broker apart from making him liable for various other consequences;
++ if a member of the stock exchange does not enter into any transaction under the BOLT system he is not required to pay the transaction charges. It is only if the member trades through the BOLT system the member is required to pay transaction charges depending upon the volume of trading because, once the trading through the BOLT system takes place the member is assured that the other contracting party is a genuine buyer or seller as the case may be and that the price offered by the opposite party would be in consonance with the norm laid down by the stock exchange and that the transaction would be settled efficiently and expeditiously. The fact that the stock exchange levies or collects lesser transaction charges where the value of the transaction is higher, cannot be a ground to hold that no managerial services are rendered by the stock exchange, because, what should be the criteria for levying the transaction charges is left to the discretion of the stock exchange;
++ with a view to regulate the trading in securities, the stock exchange provides risk management and surveillance to the stock brokers to ensure the safety of the market. The surveillance function involves price monitoring, exposure of the members, rumour verification on a daily basis and take remedial actions like reduction of filters, imposition of special margin, transferring scrips on a trade to trade settlement basis, suspension of scrips / members, etc. These are some of the identified managerial services rendered by the stock exchange for which transaction charges are levied;
++ the in-built mechanism in the BOLT system itself is a part of the managerial service rendered by the stock exchange and even the in-built mechanism provided in the system is varied or altered by the stock exchange depending upon the circumstances encountered during the course of rendering managerial services. Therefore, the Tribunal was in error in holding that no technical or managerial services are rendered by the stock exchange by providing the BOLT system of trading in securities and the assessee was liable to deduct tax at source before crediting the transaction charges to the account of the stock exchange;
++ though Section 194J was inserted with effect from 1/7/1995, till the assessment year in question both the revenue and the assessee proceeded on the footing that Section 194J was not applicable to the payment of transaction charges and accordingly, during the period from 1995 to 2005 neither the assessee has deducted tax at source while crediting the transaction charges to the account of the stock exchange nor the revenue has raised any objection or initiated any proceedings for not deducting the tax at source. Thus, no fault can be found with the assessee in not deducting the tax at source under Section 194J of the Act and consequently, no action could be taken under Section 40 (a)(ia) of the Act. It is not the case of the revenue that on account of the failure on the part of the assessee to deduct tax at source, the revenue has suffered presumably because, the stock exchange has discharged its tax liability for the assessment year in question.
Assessee's appeal partly allowed
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