Most Important ruling of Bombay High Court in the context of TDS u/s 194J vis a vis 40(a)(ia)

Enclosed is the recent important decision of the Bombay High Court in the case of Kotak Securities ltd.: ITA No. 3111 of 2009 (dated 21.10.2011) wherein on the facts of the case, the Court had held as under:

·         The transaction charges paid by the assessee company to the Bombay Stock Exchange(‘BSE’) as one of its members, towards use of BOLT system of BSE would constitute ‘fees for technical services’ on the ground that BSE provides ‘managerial’ services to its members by regulating and managing the business of dealing in shares/stock and is, therefore, TDS under section 194J of the IT Act should have been deducted by the assessee on such transaction charges.

·         The Court had also distinguished the Madras High Court decision in the case of Skycell Communications Ltd.: 251 ITR 53, on the ground that : :

Ø  in the present case, unlike in the case of cellular mobile phones, there is direct inkage between the managerial services rendered and the transaction charges levied by the stock exchange

Ø  Unlike in the case of cellular mobile phones where the user of the cellular telephone is at the discretion of the subscriber and the service provider is not regulating user of the cellular mobile phone by the subscriber, in the case of BOLT system, the user of the system is restricted to the trading in securities and the same is completely regulated by the stock exchange

·         The Court further observed, in the facts of the case,  that although TDS should have been deducted u/s 194J on the above transaction charges, yet no disallowance under section 40(a)(ia) of the Act could be made in this case on the ground that provisions of section 194J was there on the statute book since 1995 and for almost a decade to A.Y. 2006-07 till the year under appeal, neither the assessee nor the Revenue had ever contended that TDS is deductible on such transaction charges. It was only from subsequent  assessment  year 2007-08, the assessee company had deducted TDS on such payments treating the same as royalty payment. Therefore, in this background, the Court held that in view of the undisputed decade old practice, the assessee had bonafide reason to believe that the tax was not deductible at source under Section 194J of the Act and, therefore, the assessing officer was not justified in invoking Section 40(a)(ia) of the Act and disallowing the business expenditure by way of transaction charges incurred by the assessee.