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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.3141 OF 2016 [Arising out of S.L.P.(C) No.19907 of 2012]

C.I.T.-4, MUMBAI                  ...APPELLANT(S)          VERSUS

M/S KOTAK SECURITIES LTD.                    ...RESPONDENT(S)

WITH

CIVIL APPEAL NO. 3143 OF 2016 [Arising out of Special Leave  Petition  (Civil)  No.19908  of  2012],  CIVIL  APPEAL NO.3145 OF 2016 [Arising  out  of  Special  Leave  Petition (Civil) No.19909 of 2012], CIVIL APPEAL NO.3146 OF 2016 [Arising  out  of  Special  Leave  Petition  (Civil)  No.33059  of 2012],  CIVIL APPEAL NO.3150 OF 2016 [Arising  out  of Special  Leave  Petition  (Civil)  No.37694  of  2012],  CIVIL APPEAL NO.3151 OF 2016 [Arising out of  Special  Leave Petition (Civil) No.17553 of 2015], CIVIL APPEAL NO._3152 OF  2016 [Arising  out  of  Special  Leave  Petition  (Civil) No.5893  of  2015],  CIVIL  APPEAL  NO.3154  OF  2016 [Arising  out  of  Special  Leave  Petition  (Civil)  No.17549  of 2015],  CIVIL APPEAL NO.3155 OF 2016 [Arising  out  of Special Leave Petition (Civil) No.18394 of 2015] AND CIVIL APPEAL  NO.3156  2016 [Arising  out  of  Special  Leave Petition (Civil) No.8294 of 2016 @ CC NO.3427 of 2016]

J U D G M E N T

RANJAN GOGOI, J.

1. Leave granted in all the Special Leave Petitions.

2. Civil  Appeal  arising  out  of  Special  Leave  Petition

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(Civil)  No.37694  of  2012  (M/s  Kotak  Securities  Ltd.  Vs.

C.I.T.4(3), Mumbai) is taken as the lead case as a decision on

the  issue(s)  arising  therein  would  determine  the  questions

arising in all the other appeals under consideration.

3. By  the  impugned  order  dated  21st October,  2011

passed in the aforesaid appeal, the High Court of Bombay has

held  that  the  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,

under the provisions of Section 194J of the Income Tax Act,

1961  (for  short  “the  Act”),  on  such  payments  TDS  was

deductible  at  source.  The  said  deductions  not  having  been

made by the appellant – assessee, the entire amount paid to

the Bombay Stock Exchange on account of transaction charges

was not deducted in computing the income chargeable under

the head “profits and gains of business or profession” of the

appellant – assessee for the Assessment Year in question i.e.

2005-2006.  This  is  on  account  of  the  provisions  of  Section

40(a)(ia) of the Act.  Notwithstanding the above, the Bombay

High Court held that in view of the apparent understanding of

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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 the disallowance made by the Assessing Officer

under  Section  40(a)(ia)  of  the  Act  must  be  held  to  be  not

correct.

4. Aggrieved  by  the  finding  that  transaction  charges

paid to the Stock Exchange are fees for “technical services”, the

assessee – Kotak Securities Ltd. is in appeal before us whereas

the Revenue seeks to challenge the later part of the order of the

High  Court  set  out  above.   The  assessee  is  also  in  appeal

against  similar  orders  passed  in  respect  of  subsequent

assessment orders in the case of the assessee itself.   As the

order  of  the  High Court,  with regard to  transaction charges

being in the nature of fee for technical services, has been made

applicable to the assessments in case of other assessees, such

of the assessees who are aggrieved thereby have filed the other

appeals before us.  

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5. The  relevant  provisions  of  the  Act  which  have  a

material bearing to the issues arising for determination in the

present  appeals  may now be  noticed.  Section 194J;  Section

40(a)(ia) of the Act introduced by  Finance (No.2) Act, 2004 with

effect from 1st April, 2005; and Explanation 2 of Section 9(1)(vii)

which are relevant for the purpose of the present case reads as

under:

“194J. Fees  for  professional  or  technical services.

(1)  Any person,  not  being an individual  or  a  Hindu undivided family, who is responsible for paying to a resident any sum by way of—

(a) fees for professional services, or

(b) fees for technical services or

(c) royalty, or

(d) any sum referred to in clause (va) of section 28

shall at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per  cent  of  such  sum  as  income-tax  on  income comprised therein: ….............................. …..............................

Explanation.—For the purposes of this section,—

(a)............................

(b)  "fees for  technical  services"  shall  have the same

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meaning  as  in  Explanation  2  to  clause  (vii)  of sub-section (1) of section 9;

…..............................

40. Amounts  not  deductible.  Notwithstanding anything  to  the  contrary  in  sections  30  to  38,  the following amounts shall not be deducted in computing the  income chargeable  under  the  head  “Profits  and gains of business or profession” (a) in the case of any assessee- (i) …...... ….. …... (ia)  any  interest,  commission  or  brokerage,  rent, royalty,  fees  for  professional  services  or  fees  for technical services payable to a resident, or amounts payable  to  a  contractor  or  sub-contractor,  being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been  paid  during  the  previous  year,  or  in  the subsequent  year  before  the  expiry  of  the  time prescribed under sub-section (1) of section 200: Provided that where in respect of any such sum, tax has been deducted in any subsequent year,  or  has been deducted in the previous year but paid in any subsequent  year  after  the  expiry  of  the  time prescribed under sub-section (1) of section 200 such sum shall be allowed as a deduction in computing the income of  the  previous  year  in  which such tax has been paid. Explanation.-.........

9.  Income  deemed  to  accrue  or  arise  in  India (1) The following incomes shall be deemed to accrue or arise in India:- (i)..................... …...................... …...................... (vii)  income  by  way  of  fees  for  technical  services payable by— (a) ...............

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(b) ............... (c) ............... …....................... Explanation 2.—For the purposes of this clause, "fees for  technical  services"  means  any  consideration (including  any  lump  sum  consideration)  for  the rendering of any managerial, technical or consultancy services  (including  the  provision  of  services  of technical  or  other  personnel)  but  does  not  include consideration for any construction, assembly, mining or  like  project  undertaken  by  the  recipient  or consideration which would be income of the recipient chargeable under the head "Salaries".

6.  What  meaning  should  be  ascribed  to  the  word

“technical services” appearing in Explanation 2 to clause (vii) to

Section 9(1) of the Act is the moot question.  In Commisioner

of  Income-Tax  Vs.  Bharti  Cellular  Ltd.  1 this  Court  has

observed as follows:

“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”.

7. “Managerial  and  consultancy  services”  and,

therefore,  necessarily  “technical  services”,  would  obviously

involve services rendered by human efforts.  This has been the 1

(2011) 330 ITR 239 (SC)

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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

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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

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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  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

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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.

11. In view of above conclusions, it will not be necessary

for  us  to  examine  the  correctness  of  the  view taken by  the

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Bombay  High  Court  with  regard  to  the  issue  of  the

disallowance under Section 40(a)(ia) of the Act.  All the appeals,

therefore,  shall  stand disposed in the light of  our views and

observations as indicated above.  

….……......................,J. [RANJAN GOGOI]

….……......................,J. [PRAFULLA C. PANT]

NEW DELHI MARCH 29, 2016