DEPUTY COMMISSIONER OF INCOME TAX vs. ANGEL BROKING LTD. ITAT, MUMBAI ‘A’ BENCH N. V. Vasudevan, J. M. & R.K. Panda, A.M. ITA No. 7031/Mum/2008; Asst. yr. 2005 – 06 9th December, 2009 (2010) 35 SOT 457 (Mumbai) Legislation referred to Section 9(1)(vii), 40(a), 44AA, 194J Case pertains to Asst. Year 2005-06 Decision in favour of Assessee Business expenditure—Disallowance under s. 40(a)(ia) consequent to non deduction of tax at source from payments by way of fees for technical services—Assessee , a stock broker having screen based trading facilities—Assessee paying various charges to stock exchange towards VSAT, BOLT, Leased line, Demat facilities provided by the stock exchange—AO treating these payments to be in the nature of fees for technical services and disallowing the same under s. 40(a)(ia) for failure to deduct tax at source therefrom—On appeal CIT(A) holding that the payments made by the assessee were not in the nature of fee for technical services—Technical service’ referred in s. 9(1)(vii) contemplates rendering of a ‘service’ to the payer of the fee—Mere collection of a ‘fee’ for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services—Members of the stock exchange and the public at large are beneficiaries of the technical improvements like screen based trading—Stock exchanges are not the owners of this technology to provide them for a fee to prospective use but are themselves consumers of the technology—Therefore stock exchanges cannot be considered to have rendered technical services to the stock brokers and therefore the payments in question cannot be considered as fees for technical services—Order of CIT deleting the disallowances accordingly upheld Held : ‘Fees for technical services means any consideration for rendering any technical service. The Explanation does not by itself throw any light on what is a technical service. Two things are, however, clear from the setting of s. 9(1)(vii) r/w Expln. 2, viz., (i) That there should be an agreement to engage/utilise technical service and a person undertaking to render them; (ii) If there is a contract of employment and the employee renders technical service under a contract of employment then the payment of remuneration for such services are outside the purview of "fees for technical services". (Para 8) Technical service’ referred in s. 9(1)(vii) contemplates rendering of a ‘service’ to the payer of the fee. Mere collection of a ‘fee’ for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services. (Para 9) Stock exchanges as a measure of providing infrastructure to its members install VSAT, lease line facilities, BOLT charges and Demat charges to its members. Fees collected in this regard is nothing but fee paid for use of facilities provided by the stock exchange. Such facilities are available for use by any member. Satellite based trading enables trading member to trade on exchange from their place of work across the country. Stock exchange has to get permission of DoT for installing and setting up VSAT or lease line system. Charges levied by the stock exchange on its members are for the purpose of recovery of its cost in providing these facilities to the members. Stock exchanges do not provide any technical services by installing VSAT network. It is the facility provided to its members, such payment cannot be said to be nature of fees for any technical services rendered. Stock exchanges merely provide facilities for its members to purchase and sell shares within framework of its bylaws. It also provides for a mechanism for settlement of dispute between the brokers and its customers. Stock exchanges do not involve them in providing any technical services to any of its members. The AO in coming to the conclusion that the payment was for fee for technical services has relied on the fact that the screen based trading is sophisticated method of trading. This by itself will not be sufficient to holding technical services being rendered. The AO has also held that services are not available to the public at large but only to registered members, again this by itself will not make the services in question as technical services. Another reason given by the AO is that speed at which transactions were completed and the case with which transactions are done in screen based trading. This again is not relevant criteria for holding that the services rendered were technical services. Fact that the data provided on screen will provide better data for carrying out transaction will not again be sufficient to hold that technical services are being rendered. All the above features present in screen based trading saves time. This is the result of improved technology. That does not mean that stock exchange is providing technical services. Members of the stock exchange and the public at large are beneficiaries of these technical improvements. Stock exchanges are not the owner of this technology to provide them for a fee to prospective use. They are themselves consumers of the technology. The CIT(A) was right in holding that the payment in question is not fee for technical services rendered.—Skycell Communications Ltd. vs. Dy. CIT (2001) 170 CTR (Mad) 238 : (2001) 251 ITR 53 (Mad) followed. (Para 10) Conclusion : VSAT, BOLT, Leased line, Demat charges paid by stock brokers to stock exchanges are not in the nature of fees for technical services and cannot therefore be disallowed under s. 40(a)(ia) for not deducting tax at source therefrom. In favour of : Assessee
That way i have seen companies deducting u/s 194J but have stopped after the above judgement. They say it is technical service.
So that debatable if from abundant precaution if we need to deduct be deducted in which section as it could be also deducted under the head rent as the lines are leased. So it could be deducted under the head rent for machineries.
Dear All I would like to share on more decision according to this Liability TDS not arises , however these decisions are given by high court & assessee can't stop deduction of TDS on the basis high court decision.
HIGH COURT OF DELHI CIT v.
Bharti Cellular Ltd.
ITA No. 1120 of 2007
October 31, 2008
RELEVANT EXTRACTS :
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5. In the present appeals, it is the case of the Revenue that theassessees were liable to deduct tax at source when they made the payments in respect of the inter-connect/port access charges. It was contended before us that the non-deduction/short deduction under section 201 (1) of the said Act is not required to be made good by the assessee inasmuch as MTNL/BSNL/other companies who would have been the deductees, have already declared receipts of the payments made by the assessees in their respective returns of income tax and have paid the entire tax. The learned counsel for the Appellant however, contended that the respondents/assessees were liable to pay interest under section 201 (1A) of the said Act, as they had not deducted tax at source which they were liable to deduct under section 194J in respect of the payments made by them to MTNL/BSNL/other companies for inter-connect/port access charges as the same were fees for technical services. According to the learned counsel, the provision of the interconnect/port access facility was itself a service. According to her, the agreement between the parties themselves described the arrangement as providing telecommunication services. It was then contended that since the services were of a technical nature in the sense that it was connected with the use of machinery involving expertise, skill and technical knowledge, the charges paid by the respondents/assessees were nothing but fees for technical services.
6. On the other hand, the counsel appearing on behalf of the respondents submitted that the payments made by the respondents to MTNL/other companies in respect of interconnect/port/access charges were not covered within the expression ?fees for technical services? as used in section 194J of the said Act. They submitted that their case was clearly covered by the decision of the Madras High Court in the case of Skycell Communications Ltd. and Another v. Deputy Commissioner of Income-tax and others:  251 ITR 53 (Mad), wherein the payment made by a subscriber to the provider of cellular mobile facility was held not to amount to fees for technical services within the meaning of Section 194J read with Section 9 (1) (vii), Explanation 2 of the said Act. It was contended that the mere collection of a fee for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for ?technical services.? It was also contended that unless and until, there is an element of human interface, the facility of interconnection/port access cannot be regarded as a technical service. Reliance were also placed on an earlier decision of this Court in the case of J.K. (Bombay) Ltd v Central BVoard of Direct Taxes and Anr : (1979) 118 ITR 312, which has considered the expression ?technical service? within the context of Section 80-O. It was contended that in the said decision, it was pointed out that ?technical service? has two components. The first is the use of tools and the second being the application of human reason to the properties of matter and energy. It was, therefore, contended that unless and until the element of human interface was present, the facility provided by the MTNL/other companies could not be regarded as a ?technical service?.
7. It was also contended that since the expression fee for technical service? as appearing in Section 194J, is to be construed in the same manner as given in Explanation 2 of Section 9 (1) (vii) of the said Act, the entire expression ?managerial, technical or consultancy services? would have to be considered. Thus, the word technical would take colour from the words managerial'` and consultancy and cannot be considered in the general or wider sense. Since both managerial and consultancy services, by their very nature, involve a human element, the technical services which are relevant for the purpose of Section 194J would be those technical services which involve human interface/element.
8. It was also contended on behalf of the respondents that the entire process of making a call and switching the call from one network to the other is done automatically on the basis of machines without the provisions of any service by human beings. Therefore, it was submitted on behalf of the respondents, the interconnect/port access facility cannot be regarded as a technical service. Consequently, the payments made for such interconnect/port access charges could not fall within the meaning of fees for technical service as used in Section 194J of the said Act.
9. In rejoinder, the learned counsel for the Appellant/Revenue submitted that the decision of the Madras High Court in the case of Skycell (supra) is clearly distinguishable. She submitted that in the case of Skycell (supra), the payments which were under contemplation, were the payments by individual subscribers to their respective cellular mobile service providers, whereas in the present appeals, the payments in question are those made by the cellular mobile service providers to MTNL/other companies for interconnect/port access charges. Consequently, she submitted that the decision of the Tribunal in holding that the payments made to MTNL/other companies in respect of the interconnect/port access charges were outside the purview of Section 194J of the said Act, was not correct in law. She contended that the Tribunal, having followed the decision of the Madras High Court in the case of Skycell (supra), had erred in law inasmuch as that decision was clearly distinguishable.
10. Section 194J which relates to fees for professional or technical services?, so much as is relevant, reads as under:- ?194J. (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, xxxx xxxx xxxx xxxx 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 : xxxx xxxx xxxx xxxx Explanation: For the purposes of this section, (a) professional services means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section; (b) fees for technical services shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; xxx xxx xxx xxx
11. It is apparent that in respect of fees for technical services tax is to be deducted at source at 5% (as it then was). It is also clear that the expression fees for technical services? has the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of Section 9. The said Explanation 2 reads as under:- 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. The aforesaid explanation makes it clear that fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services but does not include consideration for any construction, assembly, mining or like products in the country by the recipients or consideration which would be income of the recipients chargeable under the head salaries. The said definition is in two parts. The first part is means and includes type of definition and the second part is does not include definition. In the present appeals we are not concerned with the second part. The entire focus is on attracted to the first part and that, too, to the expression consideration . for the rendering of any managerial, technical for consultancy services. It is only if the payments made by the respondents/assessees to MTNL/other companies in respect of interconnect/port access charges fall within the ambit of this expression that the said payments could be regarded as fees for technical services as contemplated under Section 194J of the said Act.
12. In Skycell (supra), a learned single judge of the Madras High Court noted that installation and operatrion of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee. It was also held that technical service referred to in Explanation 2 to Section 9 (1) (vii) contemplated the rendering of a service to the payer of the fee and that mere collection of a fee for use of a standard facility provided to all those willing to pay for it did not amount to the fee having been received for technical services. We find ourselves to be in agreement with the views expressed by the learned single Judge of the Madras High Court in Skycell (supra). However, we still have to deal with the submissions made by the learned counsel for the Appellants/Revenue that the payments that were considered in the case of Skycell (supra) were those made by a subscriber to the cellular mobile telephone facility provider and not by one cellular network provider to another. For this purpose, we must examine the appeals at hand de hors the decision of the Madras High Court in Skycell (supra).
13. We have already pointed out that the expression fees for technical services as appearing in section 194J of the said Act has the same meaning as given to the expression in Explanation 2 to section 9 (1) (vii) of the said Act. In the said Explanation the expression fees for technical services means any consideration for rendering of any managerial, technical or consultancy services?. The word technical is preceded by the word managerial and succeeded by the word consultancy. Since the expression technical services is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. The said rule is explained in Maxwell on The Interpretation of Statutes (Twelfth Edition) in the following words:- Where two or more words which are susceptible of analogous meaning are coupled together, noscitur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general. his would mean that the word technical would take colour from the words managerial and consultancy, between which it is sandwiched. The word managerial has been defined in the Shorter Oxford English Dictionary, Fifth Edition as:- of pertaining to, or characteristic of a manager, esp. a professional manager of or within an organization, business, establishment, etc. The word manager has been defined, inter alia, as:- a person whose office it is to manage an organization, business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an organization etc; a person controlling the activities of a person or team in sports, entertainment, etc. It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression manager and consequently managerial service has a definite human element attached to it. To put it bluntly, a machine cannot be a manager.
14. Similarly, the word consultancy has been defined in the said Dictionary as the work or position of a consultant; a department of consultants. Consultant itself has been defined, inter alia, as a person who gives professional advice or services in a specialized field. It is obvious that the word consultant is a derivative of the word consult which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.
15. From the above discussion, it is apparent that both the words managerial and consultancy involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word technical as appearing in Explanation 2 to Section 9 (1) (vii) would also have to be construed as involving a human element. But, the facility provided by MTNL/other companies for interconnection/port access is one which is provided automatically by machines. It is independently provided by the use of technology and that too, sophisticated technology, but that does not mean that MTNL/other companies which provide such facilities are rendering any technical services as contemplated in Explanation 2 to Section 9 (1) (vii) of the said Act. This is so because the expression technical services takes colour from the expressions managerial services and consultancy services which necessarily involve a human element or, what is now days fashionably called, human interface. In the facts of the present appeals, the services rendered qua interconnection/Port access do not involve any human interface and, therefore, the same cannot be regarded as technical services as contemplated under Section 194J of the said Act.