Income Tax Appellate Tribunal - Hyderabad
M/S Karvy Computershare Pvt.,. Ltd, ... vs Department Of Income Tax on 16 January, 2013
IN THE INCOME TAX APPELLATE TRIBUNA L
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
and
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No. 328/Hyd/2012
Assessment year 2008-09
Asst. CIT vs. M/s. Karvy Computer-
Circle-2(1) share Pvt. Ltd., Hyderabad
Hyderabad PAN: AACCK2193D
Appellant Respondent
Appellant by: Smt. Amisha S. Gupt
Respondent by: Sri P. Muralikrishna
Date of hearing: 16.01.2013
Date of pronouncement: 28.03.2013
O R D E R
PER CHANDRA POOJARI, AM:
This appeal by the Revenue is directed against the order of the CIT(A)-III, Hyderabad dated 15.12.2011 for assessment year 2008-09.
2. The Revenue raised the following grounds:
i) The learned CIT(A) has erred in facts and circumstances of the case for not considering the technical services provided by the NSDL and CDSL under the head of "Settlement and Custody Fees" as professional/technical services u/s. 194J.
ii) The learned CIT(A) erred in facts and
circumstances of the case by not
sustaining the disallowances made by the AO u/s. 40(a)(ia) for failure to deduct TDS by the assessee-company on professional/technical services rendered by the NSDL and CDSL.2 ITA No. 328/Hyd/2012
M/s. Karvy Computershare Pvt. Ltd.
===========================
iii) The learned CIT(A) has erred in not upholding the disallowances made by the AO u/s. 40(a)(ia).
3. Brief facts of the issue are that the only issue in this case relates to the disallowance of an amount of Rs. 1,39,78,121 made u/s 40(a)(ia) of the Act in the assessment. The assessee is a company, which derives income as a Registrar and share transfer agent to various companies. For the assessment year 2008-09, it has filed the return of on 30.09.2008 showing income of Rs. 40,89,42,680. During the assessment proceedings, the Assessing Officer noticed that the assessee has claimed an amount of Rs. 1,39,78,121 towards 'Settlement and Custody Fees', shown under 'Operative Expenses'. On query raised by him regarding TDS on such payment, while explaining about their activities and the nature of interaction with NSDL/CDSL, the assessee has submitted that the companies whose shares are listed in stock exchange are interested to know the movement of share holding periodically. For this purpose, they request NSDL/CDSL to provide data base. On receiving such request, the NSDL/CDSL extend access to retrieve such data from their website. For providing access, the NSDL charges the client on each occasion. It was stated that the charges paid to NSDL/CDSL are debited to the account, called 'Settlement and Custody Fees'. Stating that such activity of NSDL/CDSL is neither in the nature of contract nor professional/technical services, it was submitted that such expenditure do not attract TDS. However, the AO has not accepted such submissions of the assessee. He noted that the assessee company has availed professional services of NSDL/ CDSL and as per assessee's specification the work is being carried out by NSDL/CDSL, for which they charge to the assessee company. Stating that such payment made to NSDL/CDSL is in the nature of professional services, he held 3 ITA No. 328/Hyd/2012 M/s. Karvy Computershare Pvt. Ltd.
=========================== that provisions of section 194J are attracted to such payment and tax was deductible at source on such payment. Since no TDS has been made on such expenditure, invoking provisions of section 40(a)(ia) of the Act, the AO disallowed the said amount, while completing the assessment vide order dated 31.12.2010 passed u/s 143(3) of the Act.
4. Before CIT(A), it was submitted by the assessee that the AO has disallowed the said amount of Rs. 1,39,78,121 shown as 'Settlement and Custody Fees', after holding that such payment was in the nature of professional services, under the provision of section 194J of the Act and the assessee was liable to deduct tax at source on the same. During the course of assessment proceedings, the assessee, while clarifying about such expenditure, has submitted that such payment were made to NSDL / CDSL for providing access to their data base. It was stated that such payment were not in nature of contract nor professional/ technical services. The assessee submitted before the CIT(A) that NSDL and CDSL, which are depositories. do not provide any professional service requiring intellectual or manual skills. On request made by them to the depositories to provide access to the data base maintained by them in respect of their client companies, those depositories provide access to the assessee to their data base and the assessee downloads the data electronically. It was stated that the depository has charged fee to the assessee, for providing access to the assessee to their data base. It is further stated that by providing access to the data base, the depository has not rendered any professional services to the assessee, who is acting as a Registrar and Share Transfer Agent.
5. The assessee further clarified before the CIT(A) that on such payment made to those depositories i.e. NSDL and CDSL, it has been submitted that such amounts charged by those 4 ITA No. 328/Hyd/2012 M/s. Karvy Computershare Pvt. Ltd.
=========================== depositories are referred as "BenPos", i.e., Beneficiary Position. From the said FAQ (12) extracted from the website of NSDL, submitted by the assessee, referred above, the CIT(A) observed that while clarifying on download of beneficiary position, it is stated that for such type of downloads NSDL charges a flat fee of Rs. 5,000, where number of records are less than 10,000 and a fee of R. 10,000 for records exceeding 10,000.
6. After considering the above detailed explanation by the assessee clarifying that such payment has been made by them to NSDL and CDSL for providing access to their database for downloading the data electronically and from the manner of charging for the same by the depository, known as "BENPOS", at flat rates of Rs. 5,000 or Rs. 10,000 depending upon the number of records, the CIT(A) was of the view that such payment made by the assessee to NSDL and CDSL, shown under 'Settlement and Custody Fees', cannot be considered as falling under professional services, as defined under section 194J of the Act. Therefore, no tax was deductible at source on such payments made by the assessee to those depositories i.e. NSDL and CDSL. Under these circumstances, the CIT(A) was of the opinion that the disallowance of the said amount of Rs. 1,39,78,121 made by the AO u/s 40(a)(ia) of the Act, in the assessment, cannot be sustained. Hence, the CIT(A) deleted the same. Against this, the Revenue is in appeal before us.
7. The learned DR submitted that in this case the assessee got rendered services relating to transactions in securities viz., dematerialisation i.e., converting physical certificate to electronic form, rematerialisation i.e., conversion of securities in Demat form into physical certificates, facilitating purchase/redemption of units of mutual funds; electronic settlement of trades in stock exchanges connected to NSDL; pledging/hypothecation of 5 ITA No. 328/Hyd/2012 M/s. Karvy Computershare Pvt. Ltd.
=========================== dematerialised securities against loan; electronic credit of securities allotted in public issues, rights issue; receipts of non-cash corporate benefits such as bonus, in electronic form; freezing of Demat accounts, so that the debits from the accounts are not permitted; nomination facility for Demat accounts; services related to change of address; effecting transmission of securities; instructions to DP over internet through SEED-e facility, account monitoring facility over internet for clearing members through SPEED facility and other facilities viz., holding debt instruments in the same account, availing stock lending/borrowing facility, etc.
8. Thus, according to the DR the impugned sum paid by the assessee to NSDL/CDSL is nothing but for providing technical services and provisions of section 194J of the Act are applicable and if a person pays any sum as fee for technical services, it has to deduct tax at source on such payment, if a person fails to deduct tax at source which he was bound to deduct tax under any provisions of the Income-tax Act where he claims a deduction of any fees for technical services in computing his income and where he has not deducted TDS on such fees for technical services then no deduction of such expenditure will be allowed while computing the total income u/s/ 40(a)(ia) of the Act. According to the DR a sum of Rs. 1,39,78,171 cannot be allowed as deduction while computing the income of the assessee in view of the provisions of section 40(a)(ia) as the assessee failed to deduct TDS on the impugned amount. She drew our attention to the recent judgement of Bombay High Court in the case of CIT v. Kotak Securities Ltd., reported in 124 6 ITA No. 328/Hyd/2012 M/s. Karvy Computershare Pvt. Ltd.
=========================== TTJ 241 (Mum) where their Lordships disagreed with the findings of the Tribunal.
9. On the other hand, the learned AR submitted that 'benpos' charges levied and collected by NSDL and CDSL is only to provide access to beneficiary position of shareholding of a particular company on a particular date and there is no application of mind or provision of service of any nature. Hence it cannot be classified as managerial/technical services of any nature or kind whatsoever. The AR submitted that beneficiary position of shareholders holding shares in Demat form in each company is available with Depositories (NSDL and CDSL) as all DP upload the data regarding transfer of shares between various shareholders. Hence there is no monitoring and management of the same by NSDL and CDSL while the assessee is merely downloading such information. Benpos charges levied and collected by NSDL and CDSL is only to provide access to beneficiary position of shareholding of a particular company on a particular date and no managerial services of any nature are provided. It is merely accessing a system which is in existence and has been set up NSDL/CDSL as in the case of Skycell Communications vs. DCIT (251 ITR 53)(Mad.) which is referred and distinguished by the Bombay High Court.
10. Further he submitted that the judgement of Bombay High Court relied on by the DR is not applicable to the facts of the present case for the following reasons:
1. 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 7 ITA No. 328/Hyd/2012 M/s. Karvy Computershare Pvt. Ltd.
=========================== 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.
2. 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.
3. In other words, whatever be the measure for levying the transaction charges, the fact remains that the stock exchange regulates and manages the entire trading activities on the exchange till the transactions are finally settled. Unless the stock exchange constantly monitors the transactions relating to the sale or purchase of the securities right from the stage when the two contracting 8 ITA No. 328/Hyd/2012 M/s. Karvy Computershare Pvt. Ltd.
=========================== parties interact through the BOLT system, it would be impossible to ensure safety of the market. When there is considerable variation in the price of the securities offered to be sold or purchased the in-built system alerts and remedial measures are taken immediately so that no panic situation arises in the stock market.
4. 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 stock exchanges have to manage the entire trading activity carried on by its members and accordingly managerial services are rendered by the stock exchanges.
5. In the case of beneficiary position i.e. shareholding in a particular company on a particular date there is no monitoring or management unlike trading in shares. The benpos is the result of transactions which have been undertaken by the brokers through NSE/BSE. It is merely a system of updation of transactions by the DPs and NSDL/CDSL are merely centralized system of updation of the records of the DPs. Hence the question of provision of service of any nature to the Appellant does not even arise for consideration. The payment is in the nature of license fees and not in the nature of fees for technical/ managerial services as argued by the Department.
9 ITA No. 328/Hyd/2012M/s. Karvy Computershare Pvt. Ltd.
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11. According to the AR there is no rendering of technical services. The assessee only got access to the data. He relied on the judgement of Madras High Court in the case of Skycell Communications Ltd. & Anr. vs. DCIT (251 ITR 53) wherein held that providing of cellular mobile telephone services to the subscribers does not come within the definition of Technical Services as in section 194J r.w.s. 9(1)(vii), Explanation 2 of the Income-tax Act and the firms and companies subscribing to the network are not required to deduct tax at source on the payments made by them for use of such facility. Further he relied on the judgement of Calcutta High Court in the case of CIT vs. Virgin Creations (ITAT No. 302 of 2011 (GA) 3200/2011 dated 23 November, 2011) wherein their Lordships relied on the judgement of Supreme Court in the case of R.B. Jodhamal Kuthialal vs. CIT (82 ITR 570) and observed that the provisions, which has inserted the remedy to make the provisions workable, requires to be treated with retrospective operation so that reasonable deduction can be given to the section as well, decided the issue whether section 40(a)(ia) having retrospective operation or not.
12. We have heard both the parties and perused the material on record. First of all the CIT(A) observed that there is no rendering of services to the assessee and he has only access to the data base for downloading the data electronically for which the assessee paid fees so that provisions of section 194J are not applicable. The same issue was subject matter of dispute before this Tribunal, Bombay Bench in the case of Kota Securities Ltd. vs. Addl. CIT (124 TTJ 214) which was decided in favour of assessee. This matter travelled to Hon'ble Bombay High 10 ITA No. 328/Hyd/2012 M/s. Karvy Computershare Pvt. Ltd.
=========================== Court. The Hon'ble Bombay High Court considered issue and also gone through the Madras High Court judgement relied on by the assessee's counsel in the case of Skycell Communications Ltd. (supra) and it was observed in para 24 that the Madras High Court judgement is not applicable to the facts of the case. Further the Bombay High Court in paras 25 to 28 held as follows:
"25) The argument that in the present case there was no contract for rendering technical / managerial service is without any merit, because, the very object of providing the BOLT system is to provide a complete platform for carrying on the trading in securities / derivatives. 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. The fact that the transaction charge is based on the value of the transaction and not the volume of transaction is not determinative of the fact as to whether managerial services are rendered or not. In other words, whatever be the measure for levying the transaction charges, the fact remains that the stock exchange regulates and manages the entire trading activities on the exchange till the transactions are finally settled.
26) Unless the stock exchange constantly monitors the transactions relating to the sale or purchase of the securities right from the stage when the two contracting parties interact through the BOLT system, 11 ITA No. 328/Hyd/2012 M/s. Karvy Computershare Pvt. Ltd.
=========================== it would be impossible to ensure safety of the market. When there is considerable variation in the price of the securities offered to be sold or purchased the in-built system alerts and remedial measures are taken immediately so that no panic situation arises in the stock market. 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.
27) The fact that the BOLT system provided by the stock exchange has in-built automatic safeguards which automatically gives alert signal if the fluctuation in the prices of the securities exceed a particular limit prescribed by the stock exchange does not mean that the managerial services are not rendered, because, firstly, the in-built mechanism in the BOLT system itself is a part of the managerial service rendered by the stock exchange and secondly, 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.
28) The argument that the BOLT system is like a ATM system provided by the banks is also without any merit, because through the ATM system, no trading activity is carried on, whereas, through the BOLT system trading activity is carried on which is monitored/regulated/managed by the stock exchange. Therefore, in our opinion, the Tribunal was in error in holding that no technical or managerial services are rendered by the stock exchange by providing the BOLT."
13. The facts considered by the Bombay High Court on this issue are similar to the facts of the assessee's case before us. Being so, the Bombay High Court judgement in the case of Kotak Securities Ltd. (supra) squarely applies 12 ITA No. 328/Hyd/2012 M/s. Karvy Computershare Pvt. Ltd.
=========================== 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, in conformity with the judgement of the Bombay High Court, we are of the opinion that 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 at Rs. 1,39,78,121 is justified.
14. The AR submitted before us 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 Assessing Officer u/s. 40(a)(ia) of the Act 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 so, we are inclined to observe as above as held by the Hon'ble Bombay High Court.
15. In the result, Revenue appeal is allowed.
Order pronounced in open court on 28 th March, 2013.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated 28 th March, 2013
tprao
13 ITA No. 328/Hyd/2012
M/s. Karvy Computershare Pvt. Ltd.
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Copy forwarded to:
1. The Asst. CIT, Circle-2(1), 8 th Floor, B Block, IT Towers, Hyderabad.
2. M/s. Karvy Computershare Pvt. Ltd., 46, Avenue No. 4, Karvy House, Street No. 1, Road No. 10, Banjara Hills, Hyderabad.
3. The CIT(A)-III, Hyderabad
4. The CIT-II, Hyderabad
5. The DR - B Bench, ITAT, Hyderabad.