Key Summary: Supreme Court held that ‘technical services’ under Section 194J read with Explanation 2 to Section 9(1)(vii) of Income Tax Act, 1961 denote services to cater to the special needs of the consumer/user, rather not a facility / service offered to all.
1. Brief facts of case
The Hon’ble Supreme Court (SC) recently pronounced its ruling in case of Kotak Securities Ltd (taxpayer) (Civil Appeal No. 3141 of 2016). In this case, taxpayer paid transaction charges to Bombay Stock Exchange (BSE) for transacting business of sale and purchase of shares.
Taxpayer’s arguments/ contentions
- It is claimed by taxpayer that services provided by BSE did not qualify as ‘technical services’ under Explanation 2 to Section 9(1)(vii) of the Income Tax Act (the Act) and therefore, such payments were not liable to TDS (tax deducted at source or withholding tax) under Section 194J of the Act.
Tax authorities’ arguments/ contentions
- The tax officer contended that the transaction charges amounts to payment of a fee for ‘technical services’ rendered by BSE. Therefore, in terms of Section 194J of the Act, tax should be deducted at source by taxpayer on such payments. Since, TDS is not deducted at source, therefore, such payments were disallowed [in accordance with Section 40(a)(ia) of the Act] in computing income of taxpayer/ chargeable taxable under the head ‘Profits and Gains of business or profession’.
Observations of Hon’ble Bombay High Court (Bombay HC)
- On above matter, the Hon’ble Bombay HC held that subject payment falls within the ambit of fees for technical services.
2. Issue for consideration of Hon’ble Supreme Court
Whether the transaction charges paid by taxpayer to BSE would qualify as fees for ‘technical services’ in terms of Explanation 2 to Section 9(1)(vii) and accordingly liable for deduction of tax at source as per Section 194J. Further, if answer to aforesaid is affirmative, whether disallowance can be made under Section 40(a)(ia).
3. Key Observations
In relation to above, key observations/ views/ decision of the Hon’ble Supreme Court (in summary) are as follows:
- ‘Managerial and consultancy services’ [is used in Explanation 2 to Section 9(1)(vii)] and, therefore, necessarily ‘technical services’, would obviously involve services rendered by using human efforts. This has been the consistent view taken by the courts including Hon’ble SC in Bharti Cellular Ltd [(2011) 330 ITR 239 (SC)].
- Due to developments happening in scientific and technological area, human intervention may not be clear visible. Therefore, there should be more effective basis for determination of elements that can said to constitute/ construe as ‘technical services’.
- Technical services like managerial and consultancy service would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider.
- Thus, service is special and exclusive to the seeker of service. This aspect of exclusiveness is a distinguishing feature of service. On the other hand, while if the service is available to all, it would be termed as offering of facility – instead of a service.
- The BSE made available all automated services to all its members in respect of every transaction that is entered by them. In respect of said services, members paid transaction charges to BSE.
- In light of above, it can be seen that services provided by BSE do not satisfy the aforesaid test of specialized, exclusive and individual requirement of the consumer who may approach the service provider for such assistance/service. Rather, these are common services that every member of the BSE is necessarily required to avail of to carry out trading in securities in the BSE.
- In the absence of above mentioned distinguished feature(s), services rendered by BSE are merely in the nature of a facility offered or available on payment of transaction charges. Thus, such services not to be termed as ‘technical services’.
- Given the above, Hon’ble SC reversed the view of Bombay HC and held that no TDS is deductible under Section 194J on the above referred transaction charges.
- Since it is held that Section 194J is not applicable, therefore, SC did not examine the issue of disallowance under Section 40(a)(ia).
For detailed discussion/ observations of the Hon’ble Supreme Court, refer the ruling in the case of Kotak Securities Limited.
(Author – Anurag Singhal, is a Chartered Accountant from Delhi and Partner & Chief Advisor at FEALTY Advisors LLP and can be contacted at email@example.com)