Income Tax Appellate Tribunal - Mumbai
Dcit 4(1), Mumbai vs Department Of Income Tax on 23 January, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "G"
Before Shri N.V. Vasudevan (JM) & J.Sudhakar Reddy (AM)
I.T.A.No. 1825/Mum/2009 (Assessment year : 2005-06)
GSB Securities Pvt. Ltd. DCIT Range 4(1)
78/80, Ali Chambers Aayakar Bhavan
Tamarin Lane Vs. M.K. Road
Fort, Mumbai-400 023. Mumbai-400 020.
APPELLANT RESPONDENT
I.T.A.No. 2454/Mum/2009 (Assessment year : 2005-06)
DCIT Range 4(1) GSB Securities Pvt. Ltd.
Aayakar Bhavan 78/80, Ali Chambers
M.K. Road Vs. Tamarin Lane
Mumbai-400 020. Fort, Mumbai-400 023.
APPELLANT RESPONDENT
PAN/GIR No. : AAABCG7866N
Assessee by : Shri S.M. Bandi
Department by : Shri Mohamd Usman
ORDER
PER N.V. VASUDEVAN, JM :-
ITA No. 1825/Mum/09 is an appeal by the assessee while ITA No.
2454/Mum/09 is an appeal by the Revenue. Both these appeals are directed against the order dated 23.1.2009 of learned CIT(A)-IV, Mumbai relating to A.Y. 2005-06.
2. First, we shall take up the appeal of the assessee for consideration.
3. The only ground of appeal of the assessee is with regard to the action of the CIT(A) in confirming the action of the AO in disallowing the claim of the Assessee for deduction, while computing income, of 2 GSB Securities Pvt. Ltd.
Rs.6,00,000/- being admission fee paid to OTC Exchange of India Ltd., which was written off by the Assessee. The assessee is a company engaged in the business of share broking, trading and dealing in shares and securities. In the profit and loss account, the assessee had claimed as a deduction a sum of Rs. 7,00,000/-. The above sum represents a sum of Rs. 6,00,000/- paid as an admission fee and Rs. 50,000/- paid as technology fee and Rs. 50,000/- paid an annual fees for admission of the Assessee as member of OTC Exchange of India Ltd.. The Assessing Officer accepted the expenditure on account of technology fee and annual fee paid as revenue in nature and allowed claim of the assessee for deduction. As far as admission fee of Rs. 6,00,000/- is concerned, the Assessing Officer held that the aforesaid expenditure for acquiring membership of OTC Exchange was of a capital nature; and he therefore refused the claim of the assessee for deduction. Above facts transpire from the reading of the order of the Assessing Officer.
4. Against said disallowance, the assessee preferred the appeal before the learned CIT(A). The assessee explained the nature of the sum of Rs. 6,00,000/- which was claimed as deduction as follows :-
"The assessee has withdrawn his dealership from OTC where he deposited a sum of Rs. 6,00,000/- towards non-refundable admission fees. On admission of the person as a member of a Stock Exchange, payments of different nature are required to be made to the exchange. Out of such payment one is in the form of admission fees which every stock exchange charged from the member at the time of admission. Assessee has written off the amount of admission fees deposited to OTC Exchange in view of the fact that exchange not developed and neither business could be conducted on profitable lines and hence decided not to continue to enjoy the facility to OTC Exchange."
5. Before learned CIT(A), assessee submitted that the expenditure was revenue expenditure and relied on the decision of Hon'ble Delhi high Court in the case of Neset Holdings Pvt. Ltd. Vs. CIT, 282 ITR 601; wherein it was laid down that the amount paid to stock exchange as non- refundable deposit for acquiring OTC Membership was a revenue 3 GSB Securities Pvt. Ltd.
expenditure. On consideration of the submission, learned CIT(A) noticed that the assessee by letter dated 7.2.2003 addressed to OTC Exchange of India surrendered the membership of the exchange with immediate effect. OTC Exchange wrote a letter dated 25.2.2003 to the assessee informing the assessee that the request for surrender will be processed only on payment of outstanding dues to the exchange by the assessee. Learned CIT(A) found that there was no evidence on record to show that surrender of membership by the assessee has been accepted by the OTC Exchange. In those circumstances, learned CIT(A) held that the claim of the assessee for deduction of this sum during the previous year cannot be allowed as a deduction.
6. Aggrieved by the order of learned CIT(A), the assessee has raised the aforesaid ground of appeal before the Tribunal.
7. At the time of hearing of this appeal, learned counsel for the assessee again placed reliance on the decision of Hon'ble Delhi High court in the case of Nest Holdings Pvt. Ltd. (supra).
8. We have considered his submissions. We are of the view that the issue that arises for consideration is as to whether claim of the assessee for deduction of Rs. 6,00,000/- can be allowed or not. We have already seen that the Assessing Officer considered this as a deduction claimed as not of a revenue expenditure and he held that it was a capital expenditure. Before learned CIT(A), the nature of this claim as one of write off of admission fee deposited to OTC Exchange came to light. Neither the order of the Assessing Officer nor the order of the learned CIT(A) or in the submissions made before learned CIT(A) or before us details on when this sum of Rs.6 lacs being OTC membership fee was paid is found. It is also not clear as to whether this non-refundable fee of Rs. 6,00,000/- was claimed as a deduction in any earlier assessment year by the assessee. The Assessee will be entitled to claim to deduction only if this sum had not been claimed and allowed as a deduction in the past. If the non-refundable admission fee had not been claimed as 4 GSB Securities Pvt. Ltd.
deduction in the past, then, the question of writing it off and claiming it as revenue expenditure in the present assessment year can be allowed only be subject to assessee establishing that it has ceased to be a OTC Member i.e. OTC exchange must recognize the surrender of membership by the assessee. The issue before us is not as to whether a non- refundable security deposit is capital or revenue expenditure. In fact, we have no doubt in our mind that said expenditure is in the nature of revenue expenditure in the case of the assessee, who is engaged in the business of shares broking and the decision of Hon'ble Delhi High Court in the case of Nest Holdings (supra) clearly supports the stand of the assessee in this regard.
9. Since, the facts are not clear from the order of the revenue authorities, we deem it fit and proper to set aside the order of learned CIT(A) and restore the issue to the Assessing Officer for fresh consideration in accordance with law. The Assessing Officer will decide the issue keeping in mind observations made above. The appeal of the assessee is treated as allowed for statistical purposes.
10. ITA No. 2454/Mum/09 : Revenue's appeal
11. First three grounds of appeal of the revenue are with regard to action of learned CIT(A) in deleting the addition made on account of penalty 40,300/-made by the Assessing Officer.
12. Facts in this regard are that the assessee had claimed as deduction a sum of Rs. 40,300/- being fines and penalty paid to NSE. The assessee explained before the Assessing Officer that these fines and penalty were paid for various trade violation and delay in submission of some statements to NSE and are not in the nature of penalty for infraction of any law; and therefore they are fully allowable as deduction while computing income. The Assessing Officer, however, held that regulation framed by National Stock Exchange of India Ltd. are part of public policy as expressed in the Regulations framed by SEBI and are 5 GSB Securities Pvt. Ltd.
meant to ensure that the capital market does not collapse. The Assessing Officer was therefore of the view that these are penalties levied for infraction of law and are punitive in nature. The Assessing Officer therefore disallowed the claim of the assessee for deduction. Learned CIT(A), however, held that the expenditure are not in the nature of penalty for offence which is prohibited by law. He therefore deleted the addition made by the Assessing Officer.
13. We have heard the submissions of learned DR who relied on the order of the Assessing Officer. From the statement of facts before learned CIT(A), it is clear that sum of Rs. 40,300/- are penalty and fine imposed by NSE of India Ltd. in terms of their Bylaws for late submission of statements, certificates, margin payment etc. These are in the nature of trade penalty and fine and not imposed on account of non-compliance of any statutory provision under Central or State enactment. In our view, these are compensatory payments and cannot be disallowed. We therefore uphold the order of learned CIT(A) and dismiss ground No. 1-3 raised by the revenue.
14. Ground No. 4-11 raised by the revenue is with regard to action of learned CIT(A) in deleting the disallowance of VSAT, leasline charges and transaction charges on the ground that the assessee failed to deduct tax at source on these payments; and therefore, was not entitled to claim deduction of such amounts in view of the provisions of section 40(a)(ia) of the Act.
15. The assessee is a company. It is engaged in the business of stock broking and is a member of BSE and NSE. As a member of BSE and NSE, the assessee had paid a sum of Rs.1,12,845/- as lease line charges, Rs.96,000/- as VSAT operating charges and Rs.4,75,560/- as transaction charges. Nature of VSAT, leasline charges and transaction charges are as follows :-
6GSB Securities Pvt. Ltd.
VSAT Charges :- Members of the stock exchanges trade (purchase and sell) on behalf of their clients. As a part of infrastructure provided to the members a trading system, known as on screen trading is provided by stock exchanges. Such trading facilities are established by Stock exchanges to enable trading anywhere in the territory of India. Such trading systems are centralized to enable trading in various stock exchanges. Each stock exchange is connected to the member's workstations through appropriate communication network using a Very Small Aperture Terminal (VSAT) Network. Members will be connected to the central trading system through the hub of the VSAT network.
Department of Telecommunications (DOT) has to issue a license for the installation and operation of private Closed User Group (CUG) VSAT network. All capital and revenue investments toward VSATs and central infrastructure will be met by concerned Stock Exchange. To allow the members the benefit of such of VSAT network, the stock exchanges charges fees from its members.
Lease line Charges :-Stock exchanges also provide following information products :-
Market data-equity, indices, market data-derivatives, market data- corporate bonds, corporate data results (Quarterly, Half yearly, Annual), Announcements, shareholding pattern, book building data, public offerings), investors relations page, Historical data. These products are provided by different agencies. The stock exchanges in turn provide these information to its members through leased line. The leased line is arranged for by stock exchanges and the subscriber is required to pay the charges as levied by the services providers. BSE charges the port usage charges only.
Transaction charges :- Charges levied by the Stock Exchanges on its members based on the volume of the transactions done by the members on its online trading system.7
GSB Securities Pvt. Ltd.
16. According to the Assessing Officer, aforesaid sums paid by the assessee to stock exchange were in consideration for the stock exchange providing technical services to the assessee. U/s. 194J of the Ac, if a person pays any sum as fees for technical services, he has deduct tax at source on such payment. U/s. 40(a)(ia) of the Act, if a person fails to deduct tax at sources, which he was bound to deduct under any provisions of the Income Tax Act and where he claims as deduction in computing his income any fees for technical services and where he has not deducted tax at source on such fees for technical services, then, no deduction of such expenditure will be allowed while computing his total income. According to the Assessing Officer, held that the aforesaid sums paid by the assessee to the stock exchange was a fee for technical services and therefore the assessee ought to have deducted tax at source on which payment. Since, the assessee had not deducted tax at source on such payment, the aforesaid sum claimed as deduction was disallowed by the Assessing Officer. According to the Assessing Officer, trading in stock exchange is carried on through computer terminals, which are connected to NSE and BSE and various stock brokers, who are members of various stock exchanges. VSAT activity enables the brokers over the length and breadth of the country to get connected with each other and do trading. VSAT and leasline are provided by the stock exchanges and they charge fees for doing so. Thus, it was not a case of providing a simple service for a fee. It was a payment of a fees of a technical services rendered. The assessee had relied on the decision of Hon'ble Madras High court in the case of Skycell Communications Ltd. Vs. DCIT, 251 ITR 53 (Mad); wherein it was held that payment of fee for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been paid for technical services. The Assessing Officer distinguished the aforesaid decision by holding that the data provided through VSAT is not something which is not available to general public but is only available to members of stock exchange. According to the Assessing Officer, the facility provided by the stock exchange in the form of information was a technical information and not 8 GSB Securities Pvt. Ltd.
commercial information. According to the Assessing Officer, these services were specialized in nature. For all the above reasons, the Assessing Officer disallowed the claim of the assessee for deduction.
17. On appeal by the assessee, learned CIT(A) followed the order of learned CIT(A)-XV, Mumbai in the case of Kotak Securities Ltd. for A.Y. 2005-05 wherein it was held that the provisions of section 194J are not attracted to VSAT charges because those charges are not for providing any technical services but use to infrastructure facilities and therefore no disallowance can be made u/s. 40(a)(ia) of the Act. Aggrieved by the order of learned CIT(A), the Revenue has preferred the present appeal before the Tribunal.
18. Before us, learned Departmental Representative reiterated the stand of the Revenue as reflected in the order of the Assessing Officer.
19. We have considered the order of the Assessing Officer in this regard. We have heard the rival submissions. The relevant provisions of law may be referred to for the purpose of clarity.
194-J FEES FOR PROFESSIONAL OR TECHNICAL SERVICES.
(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of -
(a) fees for professional services, or
(b) fees for technical services, shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent of such sum as income-tax on income comprised therein :
Explanation : For the purposes of this section, -
(a) "professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section;
(b) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;9
GSB Securities Pvt. Ltd.
The provisions of Section 9(1)(vii) Explanation-2 is as follows:
Explanation 2 : For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".
As can be seen from Explanation-2, the fees for technical services means any consideration for rendering any technical service. The Explanation does not by itself throw any light on what is a technical service. Two things are however clear from the setting of Section 9(1)(vii) read with explanation-2, viz, (i) That there should be an agreement to engage/utilise technical service and a person undertaking to render them; (ii) If there is a contract of employment and the employee renders technical service under a contract of employment then the payment of remuneration for such services are outside the purview of "fees for technical services".
20. The Hon'ble Madras High Court in the case of Skycell Communications Ltd. 251 ITR 53 (Mad) had an occasion to examine the definition of "fee for technical services" in the context of payment of fees by a cellular/Mobile phone subscriber to the operator of the cellular/mobile phone facility. The following were its observations:
Thus while stating that "technical service" would include managerial and consultancy service, the Legislature has not set out with precision as to what would constitute "technical" service to render it "technical service". The meaning of the word "technical" as given in the New Oxford Dictionary is adjective 1. of or relating to a particular subject, art or craft or its techniques : technical terms (especially of a book or article) requiring special knowledge to be understood : a technical report. 2. of involving, or concerned with applied and industrial sciences : an important technical achievement. 3. resulting from mechanical failure : a technical fault. 4. according to a strict application or interpretation of the law or the rules : the arrest was a technical violation of the treaty.10
GSB Securities Pvt. Ltd.
Having regard to the fact that the term is required to be understood in the context in which it is used, "fee for technical services" could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with "technical" is "involving or concerning applied and industrial science".
In the modern day world, almost every facet of one's life is linked to science and technology inasmuch as numerous things used or relied upon in every day life is the result of scientific and technological development. Every instrument or gadget that is used to make life easier is the result of scientific invention or development and involves the use of technology. On that score, every provider of every instrument or facility used by a person cannot be regarded as providing technical service.
When a person hires a taxi to move from one place to another, he uses a product of science and technology, viz., an automobile. It cannot on that ground be said that the taxi driver who controls the vehicle, and monitors its movement is rendering a technical service to the person who uses the automobile. Similarly, when a person travels by train or in an aeroplane, it cannot be said that the railways or airlines is rendering a technical service to the passenger and, therefore, the passenger is under an obligation to deduct tax at source on the payments made to the railway or the airline for having used it for travelling from one destination to another. When a person travels by bus, it cannot be said that the undertaking which owns the bus service is rendering technical service to the passenger and, therefore, the passenger must deduct tax at source on the payment made to the bus service provider, for having used the bus. The electricity supplied to a consumer cannot, on the ground that generators are used to generate electricity, transmission lines to carry the power, transformers to regulate the flow of current, meters to measure the consumption, be regarded as amounting to provision of technical services to the consumer resulting in the consumer having to deduct tax at source on the payment made for the power consumed and remit the same to the Revenue.
The Court finally concluded as follows:
Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee.
When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a 11 GSB Securities Pvt. Ltd.
technical service. What he does agree to is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical service to the subscriber. The subscriber is not concerned with the complexity of the equipment installed in the exchange, or the location of the base station. All that he wants is the facility of using the telephone when he wishes to, and being able to get connected to the person at the number to which he desires to be connected. What applies to cellular mobile telephone is also applicable in fixed telephone service. Neither service can be regarded as "technical service" for the purpose of section 194J of the Act.......................
.........At the time the Income-tax Act was enacted in the year 1961, as also at the time when Explanation 2 to section 9(1)(vii) was introduced by the Finance (No. 2) Act, with effect from April 1, 1977, the products of technology had not been in such wide use as they are today. Any construction of the provisions of the Act must be in the background of the realities of day-to-day life in which the products of technology play an important role in making life smoother and more convenient. Section 194J, as also Explanation 2 in section 9(1)(vii) of the Act were not intended to cover the charges paid by the average house-holder or consumer for utilising the products of modern technology, such as, use of the telephone fixed or mobile, the cable T.V., the internet, the automobile, the railway, the aeroplane, consumption of electrical energy, etc. Such facilities which when used by individuals are not capable of being regarded as technical service cannot become so when used by firms and companies. The facility remains the same whoever the subscriber may be - individual, firm or company.
"Technical service" referred in section 9(1)(vii) contemplates rendering of a "service" to the payer of the fee. Mere collection of a "fee" for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services.
21. We have already given nature of VSAT charges and lease line charges and transaction charges paid by the assessee. Stock exchanges as measure of providing infrastructure to its members installs VSAT and lease line facilities to its members. Fees collected in this regard is nothing but fee paid for use of facilities provided by the stock exchange. Such facilities are available for use by any member. Satellite based trading enables trading member to trade on exchange from their place of 12 GSB Securities Pvt. Ltd.
work across the country. Stock exchange has to get permission of Department of Telecommunication for installing and setting up VSAT or lease line system. Charges levied by the stock exchange on its members are for the purpose of recovery of its cost in providing these facilities to the members. Stock Exchanges do not provide any technical services by installing VSAT network. It is the facility provided to its members, such payment cannot be said to be nature of fees for any technical services rendered. Stock Exchanges merely provide facilities for its members to purchase and sell shares within frame work of its bylaws. It also provides for a mechanism for settlement of dispute between the brokers and its customers. Stock Exchanges do not involve them in providing any technical services to any of its members. We are of the view that this ratio of Hon'ble Madras High court will apply to the facts of the present case. The Assessing Officer in coming to the conclusion that the payment was for fee for technical services has relied on the fact that the screen based trading is sophisticated method of trading. This by itself will not be sufficient to holding technical services being rendered. The Assessing Officer has also held that services are not available to the public at large but only to registered members, again this by itself will not make the services in question as technical services. Another reason given by the Assessing Officer is that speed at which transactions were completed and the ease with which transactions are done in screen based trading. This again is not relevant criteria for holding that the services rendered were technical services. Fact that the data provided on screen will provide better data for carrying out transaction will not again be sufficient to hold that technical services are being rendered. All the above features present in screen based trading saves time. This is the result of improved technology. That does not mean that stock exchange is providing technical services. Members of the stock exchange and the public at large are beneficiaries of these technical improvements. Stock exchanges are not the owner of this technology to provide them for a fee to prospective use. They are themselves consumers of the technology. We are therefore of the view that learned CIT(A) was right in holding that the 13 GSB Securities Pvt. Ltd.
payment in question is not fee for technical services rendered. We therefore confirmed the order of learned CIT(A) and dismiss these grounds raised by the Revenue.
22. In the result, appeal of the revenue is dismissed.
Order has been pronounced on Day of March, 2010.
(J.SUDHAKAR REDDY) (N.V. VASUDEVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : March, 2010
Copy to : 1. The Assessee
2. The Respondent
3. The CIT(A)-concerned.
4. The CIT, concerned.
5. The DR concerned, Mumbai
6. Guard File
BY ORDER
True copy
ASSTT. REGISTRAR, ITAT, MUMBAI
PS
Date Initials
1. Draft dictated on: 11.3..2010 Sr. PS/PS
2. Draft placed before author: 18.3.2010 Sr. PS/PS
3. Draft proposed & placed before the second member: JM/AM
4. Draft discussed/approved by Second Member: JM/AM
5. Approved Draft comes to the Sr. PS/PS: Sr. PS/PS
6. Order pronounced on: .3.2010 Sr. PS/PS
7. Order come back to Sr.PS/PS
8. File sent to the Bench Clerk: Sr. PS/PS
9. Date on which file goes to the Head Clerk:
10. Date of dispatch of Order: