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2015 (11) TMI 1220 - SUPREME COURT

2015 (11) TMI 1220 - SUPREME COURT - TMI - Interpretation of the term `annual turnover' - stand of the appellants is that the SAT has mis-interpreted the Explanation to paragraph 3 to hold that the "turnover" for purpose of fee will not be the value of the stocks under transaction but only the value of brokerage earned by the stock brokers like the respondent - Held that:- On a careful analysis of the Explanation occurring after paragraph 3 of Schedule III and the definition of `annual turnover' .....

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eceived or receivable by the stock broker on account of his clients in respect of sale and purchase or dealing in securities during the financial year. The view taken by the SAT that since in the wholesale debt market segment the broker has a limited role as per the RBI circular and since the broker does not receive the sale or purchase price because the payment is directly made to the seller, the broker will be saved from inclusion of the sale and purchase prices in his annual turnover, suffers .....

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ally been received by the stock broker not on his own account but on account of his clients, it could not belong to the broker and had to be passed on to the seller because such amount was receivable clearly on account of his clients in contradistinction to any part of sale and purchase price received or receivable by the stock broker on his own account. Thus viewed, the annual turnover of the stock broker as per the Explanation must include the value of entire transaction for the purpose of com .....

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id and in the present proceedings there is no challenge to the relevant provisions including those in Schedule III of the Regulations. As already noted, in the case of B.S.E. Brokers' Forum [2001 (2) TMI 957 - SUPREME COURT OF INDIA ] this Court directed the SEBI to incorporate the relevant recommendations of the Bhatt Committee in the Regulations and as a result the rate of fee on Government securities etc. dealt in the wholesale debt market was lowered and pegged at 1/10th in comparison to fee .....

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Act, 1992 (for brevity, the SEBI Act') has been preferred by the Securities & Exchange Board of India (for brevity, the SEBI') to challenge the judgment and order dated 14.08.2006 passed by the learned Securities Appellate Tribunal (hereinafter referred to as the SAT') in Appeal No.56 of 2004. 2. The substantial question of law falling for determination involves interpretation of the term annual turnover' as it finds mention in the Explanation after paragraph 3 of Schedule I .....

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uring any financial year." 3. The factual matrix may be noted only in brief. The respondent is a stock broker in the wholesale debt market segment of the National Stock Exchange and deals in debt market securities. The stand of the respondent is that the price of the dealt with securities would not form part of the concerned broker's annual turnover' and the same cannot be the basis for computing the registration fee of stock brokers like the respondent. This stand is based on a cir .....

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nt and set aside the order passed by SEBI vide its judgment and order under appeal. 4. The circular dated June 20, 1992 issued by RBI as a regulator of the wholesale debt market is the basis for the SAT to hold that for the permissible activity of bringing the parties together, no amount is received or receivable by the stock broker when he deals in the wholesale debt segment of the market and therefore the definition of "annual turnover" for the purpose of paragraphs 1, 2 and 3, as co .....

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e counterparty to the deal. However, on conclusion of the deal, he should disclose the counter party and his contract note should clearly indicate the name of the counterparty. (iii) On the basis of the contract note disclosing the name of the counterparty, settlement of deals between banks, viz., both fund settlement and delivery of security, should be directly between the banks, and the broker should have no role to play in the process. (iv) With the approval of their top managements, banks sh .....

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s for each of the approved brokers, and ensure that these limits are not exceeded." 5. The stand of the appellants is that the SAT has mis-interpreted the Explanation to paragraph 3 to hold that the "turnover" for purpose of fee will not be the value of the stocks under transaction but only the value of brokerage earned by the stock brokers like the respondent. According to Mr. C.U. Singh, learned senior counsel for the SEBI the respondent is bound by the provisions of the SEBI Ac .....

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se of the appellant that clause 1(bb)(ii) was introduced in the Regulations because the SEBI accepted the Bhatt Committee's recommendations for fixing a lower rate of fees for transactions in bonds and securities. The lower rate for transactions in bonds and Government securities was on account of comparative higher value of such transactions leading to higher turnover and that justified imposition of lower rate of fees. The grievance of the appellant is that the SAT did not consider such cl .....

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raph 47 the Court rejected the contention of the petitioners after noticing the recommendations of the Bhatt Committee to the effect that "on Government securities, PSU bonds and units, the turnover will have to be calculated separately and a fee of 1000th of 1% may be charged on such turnover than the present scale of 100th of 1%." Thereafter the Court observed that the Board was bound to bring about the corresponding changes so as to remove the anomalies pointed out by the Committee. .....

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01, 2000 it was made clear that all contracts for sale or purchase of Government securities when entered into through recognized stock exchanges, would be subject to the SEBI Act, Securities Contracts (Regulation) Act, 1956 as well as rules, regulations, bye-laws and circulars made under those Acts. It was also pointed out that Section 2(h) of the Securities Contracts (Regulation) Act, 1956 defines "securities" to include not only Government securities but also rights or interests in .....

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erent transactions. 7. On behalf of appellant reliance was placed upon judgment of this Court in the case of K.P. Varghese v. Income-tax Officer, Ernakulam (1981) 4 SCC 173 to highlight various principles relating to interpretation of statutes. In particular, reliance was placed upon the principle that plain meaning or literal construction may not be relied upon if it results in absurdity, injustice and unconstitutionality. In such a situation Court should construe the real meaning having regard .....

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so referred to an Explanation to clause 2 of Schedule IV of the Regulations only for comparing the two Explanations and pointing out that while laying down the Schedule of Fees to be paid by the Trading or Clearing Member or Self Clearing Member the expression annual turnover' has been defined differently so as to take into account "the aggregate value of all trades executed by the trading member .....". By placing reliance upon pleadings of the SEBI, the view taken by the SAT in t .....

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ot affect the present case which is related to an earlier period, only upto December 2002. Mr. Bhushan took us through the documents and pleadings to counter the allegation that respondent did not disclose the details and particulars of its business deals/accounts. According to him, it is admitted in the inspection report that the respondent dealt only in the wholesale debt market segment. 9. On behalf of respondent reliance was placed upon case of Income-tax Officer, Alleppey v. I.M.C. Ponnoose .....

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t the SAT allowed respondent's appeal on the basis of interpretation of the term annual turnover' and did not deal with other grounds. 11. We do not find any merit in the contention advanced on behalf of the respondent that the Explanation under clause 2 of Schedule IV can be used in contradistinction of differently worded Explanation under paragraph 3 of Schedule III to support the interpretation of the term annual turnover' given by the SAT. While Schedule III relates to Regulation .....

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ccurring after paragraph 3 of Schedule III and the definition of annual turnover' contained therein as also the reasonings in the impugned order we are constrained to hold that the SAT has erred in limiting the annual turnover of the respondent only to the amount of brokerage earned by it. The earning by way of brokerage represents only the part of price of securities received by the stock broker on his own account. The other and more significant part of the annual turnover' as per the E .....

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om inclusion of the sale and purchase prices in his annual turnover, suffers from an apparent error. The error lies in not appreciating that the component of aggregate of sale and purchase prices which is receivable by the stock broker even on account of his clients is included in the annual turnover. Such sale and purchase price receivable by the stock broker on account of his clients, under the directions of the RBI through the circular dated June 20, 1992 presently goes directly to the seller .....

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lanation must include the value of entire transaction for the purpose of computing the registration fee as per Schedule III of the Regulations. In no case the term annual turnover' can be so interpreted as to mean only the amount earned by the stock broker by way of brokerage. 13. The same conclusion will emerge on considering the legislative history leading to insertion of clause 1(bb) in Schedule III whereby transactions in Government securities, bonds issued by any public sector undertaki .....

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