TMI Blog2001 (2) TMI 957X X X X Extracts X X X X X X X X Extracts X X X X ..... a fee for regulating the activities of the securities market and for registration of the brokers and other intermediaries in the said market. Therefore, it is futile to contend that such levy would be either a tax or a fee on turnover. It is a settled principle in law that if the State has the authority to impose a levy then it has a wide discretion in choosing the measure of levy provided, of course, it withstands the test of reasonableness.Therefore, it would be futile to contend that the impugned fee merely because it is levied on the basis of the turnover of brokers would either amount to a turnover tax or a tax on income - TRANSFERRED CASE NO. 20 OF 2000 - - - Dated:- 1-2-2001 - B.N. KIRPAL, N. SANTOSH HEGDE AND BRIJESH KUMAR, JJ. Kirit N. Raval, S.K. Dholakia, Joseph Vellapally, Ashok H. Desai, Mahendra Anand, Shanti Bhushan, P. Chidambaram, Navroj Seervai, S. Merchant, Ms. Krishna Tanna, Ms. Bina Gupta, Ms. Vanita Bhargava, Ms. Rakhi Ray, Bharat Merchant, Arvind Minocha, Kumar Desai, Bhargava V. Desai, Ms. Kumud Singh, K.J. John, P. Venugopal, P.S. Sudheer, Sandeep Sethi, Ms. Kavita Wadia, Ms. Pratibha M. Singh, Maninder Singh, Kalpesh S. Jhaveri, Aseem Mehrotra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Lakh 4,000 Category A : Stock Brokers who are or will be members of Bombay, Delhi and Calcutta Stock Exchanges. Category B : Stock Brokers who are or will be members of Bangalore, Cochin, Madras and Ahmedabad Stock Exchanges. Category C : Stock Brokers who are or will be members of other Stock Exchanges. 4. This demand of the Board lead to a nation-wide agitation of stock brokers which resulted in the closing down of Stock Exchanges throughout India for several days. The issue which gave rise to this agitation was the high registration fee sought to be levied by the Board for the purpose of registration. Succumbing to the pressure of this agitation the Board on 19-4-1992 issued a revised fee structure for registration of brokers giving two options as below : " Option A : One time registration fee may be payable by the members in 5 annual instalments under this option as follows : For Group A exchanges viz., Bombay, Delhi and Calcutta at Rs. 50,000 per year for 5 years. Rs. 2.5 lakhs For Group B exchanges viz., Madras, Ahmedabad, Bangalore and Cochin at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtificate granted by the Board. The rule also provided that for the grant of such certificate, the applicant concerned will have to pay an amount of fees for registration in the manner provided in the regulation to be framed by the Board. 7. By a notification dated 23-10-1992 issued in exercise of the powers conferred under section 30, the Board with previous approval of the Central Government notified the Securities Exchange Board of India (Stock brokers and Sub-brokers) Regulations, 1992 ( the Regulations ). Regulation 3(1) of the same provided that applications by stock brokers for grant of certificate shall be made in the prescribed Form A through the Stock Exchange of which the said broker is admitted as a member. Regulation 6 provided that the Board on being satisfied that the stock broker is eligible for a certificate of registration shall grant a certificate in Form D to the stock broker and send an intimation to that effect to the Stock Exchange concerned. 8. The controversy in this petition emerges from Regulation 10 read with Scheduled III of the said Regulations which reads thus : "10. Payment of fees and the consequences of failure to pay fees. (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the aggregate of the sale and purchase prices of securities received and receivable by the stock-broker on his own account as well as on account of his clients in respect of sale and purchase or dealing in securities during any financial year. II. Fees to be paid by Sub-broker : ( a )A Sub-broker shall pay a fee of rupees one thousand for each financial year for an initial period of five years. ( b )After the expiry of the five years mentioned above, the sub-broker shall pay a fee of rupees five hundred for each financial year as long as the certificate remains in force. III. Manner of fees to be paid : The fees indicated above shall be paid on or before the 1st day of October each year payable by a cheque, draft or other instrument in favour of "The Securities and Exchange Board of India" at Bombay." 9. It seems that after coming into force of the said Regulation, the Board by its letter dated 7-11-1992 called upon the President/Executive Director of all the Stock Exchanges in the country to collect registration fees from each of the member broker for the year 1992 in accordance with the said regulations. 10. The members of the Stock Exchanges being agitated b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequences of non-payment of such fee would entail penal consequences affecting materially the business/profession of such defaulters, the same would also be violative of article 19(1)( g ). The levy is further impugned on the ground that the same is based on vague and imprecise concept of annual turnover which has no nexus whatsoever with the purpose for which the fee is sought to be collected and registration fee on its very nature can only be onetime fee, hence, demand for collection based on annual turnover extending over 5 years is arbitrary and unreasonable. On behalf of the members of the national stock exchange (NSE) a further argument is addressed contending that as per the provisions of the Act the stock-brokers and other intermediaries dealing in its exchange are not liable to be charged with the impugned registration fees since these are not members of their exchange. 12. In reply to the above contentions in the petition, first respondent-Board has filed its objections denying that there was lack of legislative competence to levy registration fee as contended in the petition. It is also denied that the levy in fact is a tax in the guise of a fee. On the contrary, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legated to it by the Central Government; ( k )levying fees or other charges for carrying out the purposes of this section; ( l )conducting research for the above purposes; ( m )performing such other functions as may be prescribed." 13. Taking into consideration the above multifarious duties, it contended that it required the finances for fulfilling the following statutory obligations. These are : "( a )Establishment of a computer network, i.e., to create environment and facilities to enable dealers in securities to monitor trade at various places with interlinkages through telecommunication and other facilities for on line transmission of information. ( b )Developing self-regulatory organisation, i.e., to encourage formation and recognition of associations to be formed by respective intermediaries with the objectives of evolving a code of self-regulation on matters concerned with trade practices, code of business ethics, prevention of unhealthy and unfair competition among the members with powers to discipline the erring members. ( c )Providing resources support to investors associations. ( d )Undertaking studies and preparing reports relating to, inter alia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Narayanan, Advocates for the petitioners and intervenors and Shri Kirit N. Raval, A.S.G. for the respondent No. 1. 16. From the arguments addressed before us, we will have to first consider the question whether the respondents have the necessary statu- tory authority for levying a fee of the nature which is impugned in this petition. If so, whether this fee is, as a matter of fact, a tax in the guise of fee and is so excessive as to lose the character of a fee as contended by the petitioners. The Act in question is an Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto. The Board is established under section 3 of the Act. Section 11 defines the powers and functions of the Board which mandates that it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. Sub-section (2) of the said section enumerates the various areas in which the Board is mandated to take measures t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted fact that such Rules have been notified. Pursuant to the power vested in the Board under section 30 of the Act, the Board has framed the Securities and Exchange Board of India (Stock-brokers and Sub-brokers) Regulations, 1992 (the Regulations) with previous approval of the Central Government which came into force with effect from 23-10-1992. Regulation 10 of the said Regulations provides for payment of fees as specified in Schedule III of the said Regulations. Schedule III of the said Regulations provides that every stock-broker will have to pay a registration fee where his annual turnover does not exceed Rs. 1 crore a sum of Rs. 5,000 for each financial year. In case of stock-brokers whose annual turnover exceeds Rs. 1 crore during any financial year, the fee payable is a sum of Rs. 5,000 plus 100th of 1 per cent of the turnover in excess of Rs. 1 crore for each financial year. It also provides that after the expiry of 5 financial years from the date of initial registration as a stock-broker, he will have to pay a sum of Rs. 5,000 for a block of 5 financial years commencing from the 6th financial year after the date of grant of initial registration to keep his registration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is traceable to the concerned Statute, mere omission or error in reciting the correct provision of law does not denude the power of the authority of taking a statutory action so long as its action is legitimately traceable to a statutory power governing such action. In such cases, this Court will always rely upon section 114( e ) of the Evidence Act to draw a statutory presumption that the official acts are regularly performed and if satisfied that the action in question is traceable to a statutory power, the courts will uphold such State action. See Peerless General Finance Investment Co. Ltd. v. Reserve Bank of India [1992] (2) SCC 343 and Union of India v. Tulsiram Patel [1985] (3) SCC 398. Applying the said principles to the facts of this case, we notice that the Board has the necessary competence to collect the fees for the purpose of carrying out the mandates under section 11(2)( k ) of the Act and also the power to collect the registration fee under section 12(2). Therefore, in our opinion, the Board has the necessary authority to collect a cumulative fee both for the purpose of regulating the activities contemplated under section 11 as also for the purpose of reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes enforceable by law and is not a payment for services rendered. The Court in the said case held that it is also not possible to formulate a definition of fee that can apply to all cases as there are various kinds of fees. But a fee may generally be defined as a charge for a special service rendered to individuals by some governmental agency. The amount of fee levied is supposed to be based on the expenditure incurred by the Government in rendering the services. 25. The petitioners also relied on another judgment of this Court in Chief Commissioner v. Delhi Cloth General Mills Co. Ltd. [1978] (2) SCC 367 wherein this Court has held that there are two essential elements required to be established for justifying a levy of fee. Firstly, such levy should be in consideration of certain services which the individuals accept either willingly or unwillingly and secondly the collection from such levy should not be set apart or merged in the general revenue of the State to be spent for general public purposes but should be appropriated for the specific purpose for which the levy is being made. 26. The petitioners further relied on another judgment of this Court in Om Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies in the fact that the payment is enforceable by law against a person in spite of his unwillingness or want of consent. It also held that a levy does not cease to be a fee merely because there is an element of compulsion or coerciveness present in it nor is it a postulate of a fee that it must have direct relation to the actual service rendered by the authority to each individual who obtains the benefit of the service. It also held that the element of quid pro quo in the strict sense is not always a sine qua non for a fee, and all that is necessary is that there should be a reasonable relationship between the levy of fee and the services rendered. That judgment also held that the earlier judgment of this Court in Kewal Krishan Puri v. State of Punjab [1979] (3) SCR 1217 is only an obiter. 30. In the case of City Corpn. of Calicut v. Thachambalath Sadasivan [1985] (2) SCC 112, this Court reflected the change that is taking place in the judicial thinking as to the difference between a tax and a fee. It held that the traditional concept of quid pro quo in a fee is undergoing transformation, though the fee must have relation to the services rendered, or the advantag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the respondent-Mills is neither directly nor indirectly a beneficiary of the said machinery. 34. In the case of Secretary to Government of Madras v. P.R. Sriramulu [1996] (1) SCC 345 testing the validity of the Court Fee Act involved therein, this Court negatived the contention that the expenses incurred by the administration of justice in criminal courts should not be treated as sufficient quid pro quo for the levy of court fee in civil cases. It held that such levy should not be examined so minutely or be weighed in golden scale to discern any difference between the two. It also held that there could not be any scientific method by which levy of fee may be made exactly corresponding to the expenditure in a particular year relating to the administration of civil justice. It held that it is not the requirement of law that the collection raised by the levy should exactly tally or correspond to the expenditure in the administration of civil justice. It further held that the test of correlation of the collection with the services rendered is to be reckoned at the aggregate level and not at the individual level. 35. In Vam Organic Chemicals Ltd. v. State of U.P. [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 11 requires the Board to undertake various activities to regulate the business of the securities market which requires constant and continuing supervision including investigation and instituting legal proceedings against the offending traders wherever necessary. Such activities are clearly regulatory activities and the Board is empowered under section 11(2)( k ) to charge the required fee for the said purpose, and once it is held that the fee levied is also regulatory in nature then the requirement of quid pro quo recedes to the background and the same need not be confined to the contributories alone. 38. Alternatively, the petitioners have contended that assuming that the fee levied does not require the equivalent quid pro quo even then the amount collected by way of this levy amounts to hundreds of crores of rupees which is not reasonably required by the Board for the purpose of implementing the objectives of the Act. They contend that the amount to be collected by the Board as per the present levy in the first five years will be in the region of over 400 crores and by no stretch of imagination it could be said that such a large amount of levy is required for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Computerisation Rs. 60.00 Crores b. Offices in other cities Rs. 120.00 Crores c. Increase in staff Rs. 15.00 Crores d. EDGAR Project* Rs. 75.00 Crores e. Setting up Institute forCapital market and Investor Education Campaign. Rs. 50 Rs. 320.00 Crores 320.00 Total 977.20 *EDGAR = Electronic Data Gathering, Analysis and Retrieval Systems. The project envisages automated collections, validation of vital information by/from listed companies." 39. Therefore, it contends that it will be erroneous on the part of the petitioners to contend that the Board is levying any amount in excess of its requirement. While examining the reasonableness of the quantum of levy, the same will not be done with a view to find out whether there is a co-relatable quid pro quo to the quantum of levy, because as noticed hereinabove, the quid pro quo is not a condition precedent for the levy of a regulatory fee. Such examination will have to be made in the context of the levy being either excessive or unreasonable for the requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts of investors as well as unde- rtake investors education among other duties specified in section 11. The Board has placed material before us to show that the Government of India has already delegated to the Board the functions under the SCR Act, the Depositories Act as also some of the functions under the Companies Act. To discharge all these duties, the Board has entered before us, which cannot be controverted, that it requires substantial staff members and it has to induct professional persons at various levels apart from modernising the working with the induction of latest modern technology. The Board has also contended that it has to invest huge sums of money in providing proper and necessary office space as also adequate housing facilities to the staff without which it would be extremely difficult for the Board to employ and retain its technically trained staff in its employment. To meet all these expenses, according to the Board, it has no other source of income apart from the levy contemplated under sections 11(2)( k ) and 12, except certain sum loaned by the Government of India which is repayable, hence, the Board certainly requires substantial sums of money. What the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Parliament to control the activities of the securities market in which thousands of members of gullible public will be investing huge sums of money. Therefore, there is every need for a vigilant supervision of the activities of the market and for that purpose if the statute intends that the necessary funds should be met by collection of fees from the securities market itself then the said levy cannot be questioned on the ground that the monies required for the capital expenditure of the Board should be met by the Government of India. That apart, this Court in the case of Sreenivasa General Traders ( supra ) has rejected a similar contention. 41. It is contended on behalf of the petitioners that the brokers have been subjected to a hostile discrimination vis a vis other intermediaries in the stock market inasmuch as they as a class alone are made to pay the fee on the basis of the annual turnover while others have to pay only on a flat rate. Thus, they have been compelled to bear the maximum burden of the levy while the other intermediaries are liable to pay only a nominal part of the levy. This argument, in our opinion, proceeds on the footing that the law requires eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction ultimately leading to confiscation of the gross income earned by the broker because in reality, he earns only one brokerage in all the above transactions while for the purpose of payment of registration fee, the turnover would get multiplied anywhere between 4 to 14 times in the annual turnover. In support of their contention, the petitioners have strongly relied upon the report submitted by the Bhatt Committee appointed by the SEBI itself as also Justice Mody Committee appointed by the Bombay High Court. 43. In reply, it is contended on behalf of the Board that the annual turnover of a broker reflects the number of transactions entered into by the broker which all form the subject-matter of scrutiny by the Board. However, when the Board received a letter from the petitioners opposing the levy based on annual turnover , the Board constituted an Expert Committee comprising of the persons actively associated with the functioning of the Stock Exchange and the Securities Market. It also included the Chairman of the Unit Trust of India (UTI), Joint Managing Director of the Industrial Credit Investment Corporation of India Ltd. (ICICI) - a leading merchant banker in India so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upholding a cess on tea estate which is a tax on land by the measure of yield by quantum of tea leaves produced in the tea estate held: "A tax imposed on land measured with reference to or on the basis of its yield, is certainly a tax directly on the land. Apart from income, yield or produce, there can perhaps be no other basis for levy. "A tax on land is assessed on the actual or potential productivity of the land sought to be taxed". Merely because a tax on land or building is imposed with reference to its income or yield, it does not cease to be a tax on land or buildings. The income or yield of the land/building is taken merely as a measure of the tax; it does not alter the nature or character of the levy. It still remains a tax on land or building. There is no set pattern of levy of tax on lands and buildings - indeed there can be no such standardisation. There cannot be uniform levy unrelated to the quality, character or income/yield of the land. Any such levy has been held to be arbitrary and discriminatory. No one can say that a tax under a particular entry must be levied only in a particular manner, which may have been adopted hitherto. The Legislature is free to adopt s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submission on behalf of the Board and direct that the said changes recommended by the Bhatt Committee will be incorporated in the Regulations. Subject to the above, we are of the view that the challenge made to the levy based on the measure of turnover has to be rejected. 47. At this stage, in fairness to the petitioners, we must notice the fact that the High Court at an interim stage had appointed a Committee headed by Justice A.N. Mody to submit a report as to the reasonableness of the levy. The petitioners rely heavily on the said report to support their case while they have their reservations as to the Bhatt Committee report. We are aware that the superior courts have often appointed Committees and Commissions to assist the court in technical matters with which the courts are generally not very familiar. Though in the instant case, the facts involved are matters pertaining to the securities market with its own intricacies, we find that the question involved mainly pertains to the legislative competence, nature and reasonableness of the levy. We are not called upon to decide or to recommend as to what is the best way to levy the impugned fee. So long as the Legislature ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the members as defined under section 2( e ) and the NSE being a company of which shareholders are only institutions and trading members not being shareholders, they do not fall within the definition of a member of a stock exchange. It is difficult to accept this argument. Section 3(2)( c ) requires a stock exchange which applies for recognition to specify various classes of members who will be admitted as members of the stock exchange. This does not make any distinction between a full-fledged member and a trading member of the NSE. Further, Clause 9 of Part II of Annexure to Form A requires a stock exchange, inter alia, to state the different classes of members, if any, and such number of members thereof, and the privileges enjoined by such class of persons. Definition of a trading member under the NSE bye-laws itself shows that a trading member to be a stock broker and a member of the NSE registered in accordance with Chapter V of its bye-laws. Article 1( m ) of the articles of NSE defines a trading member to mean a member of the stock exchange. Explanation to it further clarifies that there may be more than one class of trading members of the Exchange as may be determined b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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