By TIOL News Service

MUMBAI, JULY 03, 2018: THE ISSUE IS - Whether tax is to be deducted tax at source u/s 194A on finance cost or fee paid by assessee to NSCCL who is acting as intermediary under SLB Scheme and fees received is not income of NSCCL. NO IS THE VERDICT.

Facts of the case

The assessee company is engaged in the business of capital market broker and other related activities of securities business. In order to verify assessee's compliance to the provisions relating to deduction of tax at source, a survey u/s 133A of the Act was carried out. On the basis of discrepancies found relating to non–deduction of tax at source, the AO initiated proceedings u/s 201(1) of the Act. It was noticed that in the FY 2011–12, the assessee, though, had debited an amount of Rs. 7,23,21,065 under the head finance cost, however, it had not deducted tax at source on such payment. When the assessee was called upon to explain the reasons for non–deduction of tax at source on such payments made, it was submitted that the said amount was paid to NSCCL under Securities Lending and Borrowing Scheme, 1997 (SLB) of SEBI for enabling to settle short selling of securities. It was submitted, to participate in SLB scheme both lenders and borrowers were separately required to enter into agreement with an approved intermediary of SEBI. There was no direct communication or agreement between the borrower and lender under the SLB scheme. It was submitted by the assessee that the amount paid to NSCCL was not in the nature of income at its hands as NSCCL showed it as a liability in its books. Hence TDS provisions could not be applied. The AO, however, did not find merit in the submissions of the assessee. The AO held the assessee as an assessee in default and raised demand u/s 201(1) of the Act and levied interest. On appeal, CIT(A) upheld the order of AO.

Tribunal held that,

++ SLB Scheme require that a whole transaction relating to lending and borrowing of securities has to be mandatorily carried out through the approved intermediary. The approved intermediary is NSCCL and lending and borrowing of securities for which the borrowing fee has been paid was carried out through NSCCL. But the borrowing fee is not an income of NSCCL. In fact, NSCCL has also clarified the factual position by stating that the borrowing fee received by it is being shown as a liability in its books of account. Thus, the borrowing fee paid by the assessee cannot be treated as income of NSCCL requiring the assessee to deduction tax at source u/s 194A of the Act. The ultimate beneficiary of the borrowing fee paid by the assessee is the lenders of the securities borrowed by the assessee through the approved intermediary.

(See 2018-TIOL-994-ITAT-MUM)