This article is based on a judicial pronouncement by Supreme Court of India against a decision of Bombay high Court dated 21 October 2011. Appeal is filed by both assessee and revenue. We are considering the appeal of assessee relating to meaning of “technical services”.
Entering the subject
1. The arena of meaning of “fees for technical services’ as used in section 9(1)(vii) of the Income Tax Act, 1961 [the ITA] is under considerable litigation and is a subject matter of diverse opinions.
2. A rapid technological development is also one of the reason for the above situation where, in many places, highly sophisticated machines do the work without much of human intervention.
3. This topic has importance in the context of TDS u/s 195 i.e. whether such payment is to be covered under article 12 i.e. fees for technical / managerial / consultancy services [in some treaties, fees for included services or under article 7 being business receipts.
4. The above bifurcation has got significant revenue impact.
Take away points
5. It will bring big relief in following cases in terms of withholding taxes
a) for bankers where it pays to National Payments Corporation of India (NPCI) either as direct members or through sub members.
b) For telecom companies, their services now would fall under business and not u/s 194-J.
6. There is a potential benefit especially for various technical services rendered falling in first category by various foreign companies.
7. In such a case, it will fall under business category [Article 7] and such an income will not fall within purview of section 9 read with section 4 and 5.
8. This interpretation needs to be applied with care.
Facts of the case
9. Kotak Securities Limited paid transaction charges to the Bombay Stock Exchange for conducting the business of purchase / sale of securities for technical services rendered by it.
10. Bombay Stock Exchange will provide following services
a) facilities of a faceless screen based transaction,
b) a constant upgradation of the services made available
c) surveillance of the essential parameters connected with the trade including
d) those of a particular/ single transaction that would lead credence to its authenticity is provided for by the Stock Exchange.
11. All such services, fully automated, are available to all members of the stock exchange in respect of every transaction that is entered into.
12. There is nothing special, exclusive or customised service that is rendered by the Stock Exchange.
13. The service made available by the Bombay Stock Exchange [BSE Online Trading (BOLT) System] for which the charges in for which the charges in question had been paid by the appellant – assessee are common services that every member of the Stock Exchange is necessarily required to avail of to carry out trading in securities in the Stock Exchange.
14. A member who wants to conduct his daily business in the Stock Exchange has no option but to avail of such services.
15. Each and every transaction by a member involves the use of the services provided by the Stock Exchange for which a member is compulsorily required to pay an additional charge (based on the transaction value) over and above the charges for the membership in the Stock Exchange.
16. There is no exclusivity to the services rendered by the Stock Exchange and each and every member has to necessarily avail of such services in the normal course of trading in securities in the Stock Exchange.
17. Kotak did not deduct TDS u/s 194J and consequentially the entire amount got dis-allowed u/s 40(a)(ia)
18. It held that,
a) dis-allowance u/s 40(a)(ia) is not warranted but
b) The transactional fees are within the meaning of “technical services” u/s 194J
19. Revenue was aggrieved by first portion and
20. Assessee was aggrieved by second portion and both are in appeal before SC.
Points of Supreme Court of India
Impact of words managerial and consultancy services
21. Supreme Court itself in CIT v Bharati Cellular Ltd (2011) 330 ITR 239 (SC) has observed as follows relating to the element of “
“Right from 1979, various judgments of the High Courts and Tribunals have taken the view that the words “technical services” have got to be read in the narrower sense by applying the rule of noscitur a sociis, particularly, because the words “technical services” in section 9(1)(vii) read with Explanation 2 comes in between the words “managerial and consultancy services”.
noscitur a sociis meaning – The meaning of a word is or may be known from the accompanying words. Under the doctrine of noscitur a sociis, the meaning of questionable words or phrases in a statute may be ascertained by reference to the meaning of words or phrases associated with it.
“Managerial and consultancy services” and, therefore, necessarily “technical services”, would obviously involve services rendered by human efforts. This has been the consistent view taken by the courts including this Court in Bharti Cellular Ltd. (supra). However, it cannot be lost sight of that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which such services may be provided. The search for a more effective basis, therefore, must be made.
22. SC has clarified that CIT v Bharati Cellular Ltd (2011) 330 ITR 239 (SC) in terms of “requirement of involvement human intervention” will hold the field
7. The problem which arises in these cases is that there is no expert evidence from the side of the Department to show how human intervention takes place, particularly, during the process when calls take place, let us say, from Delhi to Nainital and vice versa. If, let us say, BSNL has no network in Nainital whereas it has a network in Delhi, the Interconnect Agreement enables M/s. Bharti Cellular Limited to access the network of BSNL in Nainital and the same situation can arise vice versa in a given case. During the traffic of such calls whether there is any manual intervention, is one of the points which requires expert evidence. Similarly, on what basis is the “capacity” of each service provider fixed when Interconnect Agreements are arrived at? For example, we are informed that each service provider is allotted a certain “capacity”. On what basis such “capacity” is allotted and what happens if a situation arises where a service provider’s “allotted capacity” gets exhausted and it wants, on an urgent basis, “additional capacity”? Whether at that stage, any human intervention is involved is required to be examined, which again needs a technical data. We are only highlighting these facts to emphasise that these types of matters cannot be decided without any technical assistance available on record.
9. In short, the above aspects need reconsideration by the Assessing Officer. We make it clear that the assessee(s) is not at fault in these cases for the simple reason that the question of human intervention was never raised by the Department before the CIT. It was not raised even before the Tribunal; it is not raised even in these civil appeals. However, keeping in mind the larger interest and the ramification of the issues, which is likely to recur, particularly, in matters of contracts between Indian Companies and Multinational Corporations, we are of the view that the cases herein are required to be remitted to the Assessing Officer (TDS).
Whether assessee has option to dictate the nature of services
23. SC took cognizance of the factual matrix that, the assessee does not have option to dictate the nature of services
Any element of exclusivity
24. SC took cognizance of the factual matrix that, none of the services are exclusively for any of the assessee.
Judgement of Supreme Court of India
25. Services complying cumulatively with following conditions would undoubtedly be termed as facilities provided and does not amount to “technical services”.
26. Where assessee or customer has no
a) option to dictate nature of services.
b) Exclusivity in terms of nature of services.