Under India’s Income Tax Act, the services provided by the Bombay Stock Exchange (BSE) for transactions involving the sale or purchase of shares do not constitute FTS and therefore are not subject to withholding.
Sagar Wagh, senior consultant at EY in India, believes that the ruling from this case is extremely important in the international context because it highlights the interpretation of ‘technical services’.
“The Apex Court has clarified the meaning of ‘technical services’ by distinguishing the same from ‘facility’,” said Wagh. “Further, even though the judgment is concerning the domestic transaction, the principles laid down by Supreme Court will remain the same for interpretation of fees for technical clause in tax treaties (unless ‘make available clause’ is present) and domestic law in respect of payments made to non-resident taxpayer for services received and utilised in India.”
Developments within science and technology prompted the SC to revisit the definition of ‘technical services’ as the interpretation would need clarifying for future tax treaty cases that have similar wording.
Kotak Securities appealed to the SC after the Bombay High Court attempted to impose a levy in relation to FTS.
In a previous case concerning Bharti Cellular, the meaning of the phrase ‘technical services’ was highlighted. The noscitur a sociis rule was applied, which establishes that the meaning of an unclear word may be found from accompanying words.
It was found that for income from ‘managerial and consultancy services’ to constitute FTS, they must involve services rendered by human efforts.
“The court has laid down an important principle that the technical services are those services which are provided on the specific request and needs of a particular consumer, which are exclusive to a service recipient,” said Wagh.
Technological developments have increased the amount of automated services available, which are now common to all businesses.
For example, a facility such as online banking, which is provided to all customers, cannot be termed as a provision of technical services.
“As human involvement is needed to provide managerial and consultancy services, the same would apply for technical services,” said Wagh. “Therefore, automated services without any human involvement cannot be termed as technical services in the context of Indian tax law and for treaty purposes.”
The BSE’s online trading system is a common service that every member of the stock exchange uses for trading in securities.
Every transaction by a member involves the use of these services, which requires members to pay additional charges based on the transaction value on top of charges for membership of the stock exchange.
These features of the services provided by BSE show that it is a non-exclusive ‘facility’ provided by BSE for transacting a business rather than a technical service provided to one or a section of its members.
“This ruling will go a long way to mitigate or even avoid disputes in the context of automated services from being classified as fees for technical services,” said Wagh.
