Stock Exchange transaction charges payment by members not for technical services requiring TDS u/s 194J -SC

In its latest judgment, the Supreme Court has held that the transaction charges paid to the Bombay Stock Exchange by its members are not for ‘technical services’ and hence no TDS on such payments is deductible under Section 194J of the Income Tax Act 1961.

Case Details:
Civil Appeal No. 3141 of 2016
C.I.T.-4 Mumbai (Appellant) vs. M/s Kotak Securities Ltd. (Respondent)
Coram: Justice Ranjan Gogoi and Justice Prafulla C. Pant
Date of Judgment: 29/03/2016

Brief Facts of the Case:
The Bombay High Court had upheld the action of the Assessing Officer in holding thatthe transaction charges paid by a member of the Bombay Stock Exchange to transact business of sale and purchase of shares amounts to payment of a fee for ‘technical services’ rendered by the Bombay Stock Exchange. Therefore, TDS was deductible at source on such payments u/s 194J of the Income Tax Act, 1961 (“the Act”).  The AO had, for the Assessment Year 2005-2006. disallowed the said  transaction charges u/s 40(a)(ia). However, the Bombay High Court had held that in view of the apparent understanding of both the assessee and the Revenue with regard to the liability to deduct TDS on transaction charges paid to the Bombay Stock Exchange right from the year 1995 (i.e. coming into effect of Section 194J till the Assessment Year in question), benefit, in the facts of the case, should be granted to the appellant – assessee and held the disallowance made u/s 40(a)(ia) was not correct.

The Supreme Court observed that:

Meaning ascribed to the word “technical services” was the moot question.

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”

“technical services” involve services rendered by human efforts.

Stock Exchange do not render any special, exclusive or customised service. Whereas “Technical services” like “Managerial and Consultancy service” would denote seeking of services to cater to the special needs of the consumer/user.

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.