WWW.TAXSCAN.IN - Simplifying Tax Laws IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “A”, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER

I.T.A. No. 1301/HYD/2014 Assessment Year: 2007-08 M/s. Karvy Computershare Private Limited, HYDERABAD [PAN: AACCK2193D]

Addl. Commissioner Vs of Income Tax, Range-2, HYDERABAD

(Appellant) For Assessee For Revenue

(Respondent) : Shri P. Murali Krishna, AR : Shri A. Sitarama Rao, DR

Date of Hearing : 29-09-2016 Date of Pronouncement : 05-10-2016

ORDER PER B. RAMAKOTAIAH, A.M. : This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-III, Hyderabad dated 15-04-2014 for the AY. 2007-08.

2.

Briefly stated, assessee is a company engaged in the business

of Registrar and Share Transfer Agent.

It has filed its return of

income for the AY. 2007-08 on 31-10-2007, declaring total income of Rs. 15,23,08,609/-. The Assessing Officer (AO) completed the

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assessment on 31-12-2009 u/s. 143(3) of the of the Income Tax Act [Act], determined the total income at Rs. 17,13,36,028/-.

3.

There is only one issue in appeal and that relates to the

addition of Rs. 1,76,25,313/- u/s. 40(a)(ia) of the Act. The facts are that assessee is a registrar and share transfer agent. The AO found that under ‘Operating Expenses’ , assessee had debited the aforementioned amount under the head ‘Settlement and Custody Fees’. Assessee explained that it was a registrar to issue of shares. On allotment of shares in public issue, it requests the NSDL/CDSL to credit the shares to the account of the respective shareholders. This act of crediting of shares to the respective shareholders account is technically known as ‘corporate action’.

Further, the

listed companies in the stock exchange are interested to know the precise movement of their shareholding over a period of time. They request assessee, who further requests the NSDL/CDSL to provide the database. Upon receiving the request, assessee is allowed to retrieve such data from their website and appropriate fee is charged.

The charges paid to NSDL/CDSL are debited to an

account called ‘Settlement and Custody Fees’.

Assessee argued

that the aforementioned activity was neither in the nature of a contract and nor a professional/technical service. Therefore, TDS was not deductible and subsequently there was no applicability of Section 40(a)(ia) in the case of assessee.

The AO disagreed with

the same and held that provisions of section 194J were attracted. Since

assessee

had

not

deducted

tax,

the

expenditure

Rs. 1,76,25,313/- was disallowed u/s. 40(a)(ia) of the Act.

of

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4.

I.T.A. No. 1301/Hyd/2014 M/s. Karvy Computershare Private Limited

Before the Ld. CIT(A) it was argued that the aforementioned

addition for the AY. 2008-09 had been confirmed in appeal by the CIT(A) and also by the Hon'ble ITAT, Hyderabad.

However, a

Miscellaneous Application was filed with the Hon'ble ITAT and vide their order, M.A. No. 173/Hyd/2013 arising out of ITA No. 328/Hyd/2012 the Hon'ble ITAT had admitted that it had made a mistake.

Assessee explained that the Hon'ble ITAT had followed

the order of the Bombay Bench in the case of Kotak Securities Ltd., Vs. Addl. CIT [124 TTJ 214], which was not applicable as the facts were different. The said order related to professional or technical services and in the current case, there were no such professional or technical services, accordingly, it was requested by assessee that the addition be deleted and the order of the Hon'ble ITAT confirming the same addition should not be considered as binding.

5.

However, Ld. CIT(A) did not agree and confirmed the action of

AO by stating as under: “4.3 I have seen carefully the facts, the evidence and I have also gone through the orders of the Hon'ble CIT(A) and the Hon'ble ITAT for the assessment year 2008-09 referred to supra on the same issue. Both the authorities have confirmed the addition made by the assessing officer. I have also seen the miscellaneous application and the order of the honourable ITAT on the application. Firstly, the honourable ITAT has dismissed the miscellaneous application. This clearly means that the order of the ITAT confirming the addition stands. The words on which the appellant is relying are mentioned in para-14 of the order of the miscellaneous application referred to supra. This para is reproduced below:“14. We may mention herein that we might have committed an error of judgement in wrongly applying/interpreting the judgement of the Bombay High Court as mentioned on the matter, bu the assessee is free to explore the remedy available under the law’. 15. In the result, MA filed by the assessee is dismissed’.

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4.4 A plain reading of the above para only indicates that the honourable ITAT has expressed its view stating that the order of the honourable Bombay High Court in the case of Kotak Securities applied by them may or may not be directly applicable. The word ‘may’ does not imply that the honourable ITAT has admitted that it had made a mistake. It only shows that the ITAT expresses its view that in case the appellant feels the issue to be debatable, it has full right to go to the honourable High Court of Andhra Pradesh for redressal. 4.5 Given the above facts and circumstances, I hold that the order of the honourable ITAT in the case of the appellant and on the same issue is fully applicable and binding. Respectfully following the order of the honourable ITAT, I hold that the appellant was bound to deduct taxes and not having done so section 40(a)(ia) fully applies and I find no reason to interfere with the addition made by the assessing officer”.

6.

Before us, Ld. Counsel submitted that the order of ITAT in

earlier year has relied on the decision of Hon'ble Bombay High Court in the case of Kotak Securities Ltd., Vs. Addl. CIT [124 TTJ 214] (supra) which was reversed by the Hon'ble Supreme Court in the case of CIT Vs. Kotak Securities Ltd., in Civil Appeal No. 3141 of 2016 dt. 29-03-2016 and the facts of the case are similar.

7.

Ld. DR however, fairly relied on the orders of ITAT in earlier

years and supported the orders of Ld. CIT(A).

8.

We have considered the rival contentions. Co-ordinate Bench

in assessee’s own case has held that the facts of the transaction are similar to the facts in the case of Kotak Securities Ltd., (supra) and has followed the principles laid down by the Hon'ble Bombay High Court in the above said case in an earlier year. The Hon'ble Supreme Court has reversed the directions of the Hon'ble Bombay High Court in the above referred judgment. Court has held as under:

Hon'ble Supreme

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“7. “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. 8. A reading of the very elaborate order of the Assessing Officer containing a lengthy discourse on the services made available by the Stock Exchange would go to show that apart from facilities of a faceless screen based transaction, a constant upgradation of the services made available and surveillance of the essential parameters connected with the trade including those of a particular/ single transaction that would lead credence to its authenticity is provided for by the Stock Exchange. All such services, fully automated, are available to all members of the stock exchange in respect of every transaction that is entered into. There is nothing special, exclusive or customised service that is rendered by the Stock Exchange. “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. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance/service. It is only service of the above kind that, according to us, should come within the ambit of the expression “technical services” appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act. 9. There is yet another aspect of the matter which, in our considered view, would require a specific notice. The service made available by the Bombay Stock Exchange [BSE Online Trading (BOLT) System] 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. The view taken by the High Court that a member of the Stock Exchange has an option of trading through an alternative mode is not correct. A member who wants to conduct his daily business in the Stock Exchange has no option but to avail of such services. Each and every transaction by

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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. The above features of the services provided by the Stock Exchange would make the same a kind of a facility provided by the Stock Exchange for transacting business rather than a technical service provided to one or a section of the members of the Stock Exchange to deal with special situations faced by such a member(s) or the special needs of such member(s) in the conduct of business in the Stock Exchange. In other words, 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. Such services, therefore, would undoubtedly be appropriate to be termed as facilities provided by the Stock Exchange on payment and does not amount to “technical services” provided by the Stock Exchange, not being services specifically sought for by the user or the consumer. It is the aforesaid latter feature of a service rendered which is the essential hallmark of the expression “technical services” as appearing in Explanation 2 to Section 9(1)(vii) of the Act. 10. For the aforesaid reasons, we hold that the view taken by the Bombay High court that the transaction charges paid to the Bombay Stock Exchange by its members are for 'technical services' rendered is not an appropriate view. Such charges, really, are in the nature of payments made for facilities provided by the Stock Exchange. No TDS on such payments would, therefore, be deductible under Section 194J of the Act”.

9.

Similarly, in assessee’s case also there is no human element

and services are fully automated. Moreover, there is no exclusivity and the NSDL/CDSL renders service to many other clients. Since the facts are similar to the facts in the case of Kotak Securities Ltd decided by the Hon'ble Supreme Court, we are of the opinion that ‘settlement and custody’ fees paid to NSDL/CDSL are not covered by the provisions of Section 194J, as they cannot be considered as ‘technical

services’.

Consequently,

there

can

not

be

any

disallowance on the reason that TDS was not made, u/s 40(a)(ia). Moreover, these companies have also treated these amounts as ‘incomes’ and offered to tax. The amendment brought to provisions

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of Section 40(a)(ia) do apply to the facts as well. In view of these reasons the disallowance made u/s. 40(a)(ia) is hereby deleted.

10.

Assessee’s grounds are allowed and in the result, appeal is

allowed. Order pronounced in the court on 5th October, 2016

Sd/(D. MANMOHAN) VICE PRESIDENT

Sd/(B. RAMAKOTAIAH) ACCOUNTANT MEMBER

Hyderabad, Dated 5th October, 2016 TNMM

Copy to : 1. M/s. Karvy Computershare Private Limited, Hyderabad C/o. Sri P. Murali Krishna, Advocate, 5-9-22/1, Adarshnagar, Hyderabad. 2. The Addl. Commissioner of Income Tax, Range-2, Hyderabad. 3. CIT (Appeals)-III, Hyderabad. 4. CIT-II, Hyderabad. 5. D.R. ITAT, Hyderabad. 6. Guard File.