By TIOL News Service

KOLKATA, JULY 04, 2016: THE issue is - Whether any disallowance u/s 40(a)(ia) is warranted for non-deduction of TDS on SMS charges paid when the nature of services rendered by the parties is just to provide an internet platform wherein the software of the stock broker firm gets automatic interface with the internet platform without any human intervention and SMS gets automatically generated and sent to customers of the assessee. NO is the answer.

Facts of the case

The assessee is a registered stock broker. The AO observed that the assessee had made payments to Max and E Biz towards SMS charges without deduction of tax at source. The AO made disallowance u/s. 40(a)(ia) towards the same.The assessee claimed that it had no liability to deduct tax on the said payment. The CIT(A) held that the provisions of section 194J are not applicable.

On Appeal before the Tribunal the AR submitted that the aforesaid two parties provide an Internet platform to send SMS to various customers of the assessee. There was no oral or written contract entered into by the assessee with these two parties and assessee had just consumed the SMS credits sold by the two parties. He further argued that the provisions of section 194C could be invoked only when there is a contract for carrying out any 'work' which admittedly requires human intervention. The DR submitted that there must be some oral or written contract between the assessee and the aforesaid two parties without which there is no reason for these two parties to play a role for transmission of SMS to the customers of the assessee.

The assessee claimed rebate u/s 88E to the extent of Rs 17,34,845/-. The AO restricted the same to Rs.2,66,312/-. The CIT(A) held that the Assessee is entitled to get only 4.741% of its total taxable income as rebate u/s. 88E.

Having heard the parties, the tribunal held that,

++ the nature of services rendered by these two parties are just to provide an Internet platform wherein the software of stock broker gets automatically interfaced with Internet platform without any human intervention and SMS gets automatically generated and sent to customers of the assessee. It can at best be considered only as these two parties selling SMS credits to the assessee. It is nobody's case that the transactions fall under the ambit of section 194J. In order to apply the provisions of section 194C of the Act, there should be two main ingredients – (i) the existence of contract (whether oral or written) and (ii) such contract should be for carrying out any work requiring the human intervention. In the instant case, there is no contract entered into by and between the assessee with two parties as we find that SMS credits sold by two parties were just consumed by the assessee on need basis. The activity carried on in the instant case does not fall under the definition of 'work' in terms of section 194C as it does not involve any human intervention;

++ on the issue of the assessee eligibility for getting rebate u/s 88E, the Coordinate bench of this Tribunal had dealt with similar issue in the case of Destiny Securities wherein it was held that the best revenue can disallow rebate u/s. 88E qua brokerage income at 10%, both on indirect expenses as well as interest. Following the aforesaid decision, we direct the AO to disallow the rebate u/s. 88E at 10% on the claim of the assessee and grant relief for the remaining amount.

(See 2016-TIOL-1189-ITAT-KOL)