CIT vs. Kotak Securities Limited (Bombay High Court)

“Transaction charges” paid to BSE is “fees for technical services” u/s 194-J

The assessee paid Rs.5.17 crores to the Bombay Stock Exchange towards “transaction charges” for getting access to the “BOLT” trading system. The AO held that the payment constituted ‘fees for technical services‘ u/s 194J and that as there was a failure to deduct TDS u/s 194-J, the amount was disallowable u/s 40(a)(i). This was upheld by the CIT (A) though reversed by the Tribunal on the ground that the stock exchange did not render any managerial or technical services. On appeal by the department, HELD reversing the Tribunal (except for AY 2005-06):

The assessee’s argument, based on Skycell Communications v/s DCIT 251 ITR 53 (Mad), that the stock exchange does not render “managerial or technical services” is not acceptable because while in that case the subscriber had paid a fixed amount for the use of air time on the mobile phone and was not concerned with the technology or the services rendered by the managerial staff in keeping the cellular mobile phone activated, in the case of a stock exchange, there is direct linkage between the managerial services rendered and the transaction charges levied by the stock exchange. The BOLT system provided by the BSE is a complete platform for trading in securities. A stock exchange manages the entire trading activity carried on by its members and accordingly renders “managerial services”. Consequently, the transaction charges constituted “fees for technical services” u/s 194-J and the assessee ought to have deducted TDS. However, on facts, because from 1995 to 2005 no tax was deducted and no objection was raised by the AO and because from AY 2006-07 onwards the assessee had deducted TDS, no disallowance u/s 40(a)(i) can be made for AY 2005-06.