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TMI Blog2016 (4) TMI 910X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment year 2005-06 being STA No. 02/Mum/2011 to understand the facts and implication thereof on the issues raised by the assessee. The grounds of appeal raised by the assessee reads as under:- 1(a) On the facts and in the circumstances of the case and in law the lower authorities erred in holding that the Appellant Exchange failed to collect the whole of the STT from the transactions of the institutional investors. 1(b) On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals erred in confirming the enhancement of the liability of Securities Transaction Tax (STT) by Rs. 2,80,78,444/-. 2. On the facts and in the circumstances of the case and in law the Commissioner of Income Tax (Appeals) erred in confirming the levy of interest under section 104. 3. On the facts and in the circumstances of the case and in law the Commissioner of Income Tax (Appeals) erred in directing the learned assessing officer to collect further information for determining any further shortfall of collectible STT and thereby in holding that the same shall payable by the appellant without appreciating that the CIT(A) has no such power of givi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares/units through Stock exchange 0.075% [for April & May'05] 0.1% [w.e.f. 1.6.05] 3 Non-delivery based Sales of shares/units through Stock exchange 0.015% [for April & May'05] 0.02% [w.e.f. 1.6.05] In the assessment order, AO observed that, the reasons for noncollection of amounts of STT was due to non application of appropriate rates of STT to certain types of transactions made by the Foreign Institutional Investors [FIIs]. This observation was made on the basis of information that, some broking members were showing STT liability in their Balance sheet at the year end, reflecting STT collected from their FIIs clients but not recovered by NSE. This short collection of STT, AO alleged that was because of defect in the accounting system of the NSE which failed to compute STT on certain transaction of FIIs correctly, particularly those transaction where purchase and sales have been made by FIIs on the same day for the same scrips. He held that, in terms of section 15(3) of "SEBI (Foreign Institutional Investors) Regulations, 1995", the FIIs have been prohibited from entering into nondelivery based securities transactions or any short selling of securities. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes on the value of taxable securities transaction. In other words, STT is charged under section 98 and collected under section 100 as per value computed under Rule 3. Thereafter, the assessee explained, how the exchange system calculates the STT in accordance with the Explanation to Rule 3 in the following manner:- "(a) As millions of orders are punched into the Exchange system, the system has to be designed to capture the information with speed and accuracy, so that the liability of the members is ascertained correctly. Codification is the easiest, fastest and accurate way the system can recognize a person who has done the trade and can determine his liability correctly. The Exchange system is designed in such a way. (b) The members while placing the orders are required to put their member code and the client code to identify on who's behalf the member is trading. (c) Even the computation of STT methodology as provided by Chapter VII of the Finance (No.2) Act, 2004 and the Rules made there under, recognizes the member code - client code combination to determine the STT liability and the same is also presented in the Return of STT. (d) Since certain types of investors a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent codes for purchase and sale trades for the same client to ensure that such trades are not netted. However, on occasions where client code for institutional trades are not modified by them such trades are treated as square-off trades. Thus, there is no failure in the Exchange system for the purpose of computing STT liability and no failure to collect the STT as required under section 100. Hence, your good self is requested to kindly drop your proposed action of raising further liability of STT of Rs. 5 crores". Regarding initiation of penalty proceedings under section 105 also, the assessee filed its detail explanation and submission which has been dealt by the AO at pages 11 to 13 of the assessment order. 5. However, the AO after detailed discussion, held that, the NSE has not taken any measure to enforce proper collection of STT from institutional investors like FIIs other than merely circulating the Circular to its members which has been issued by the SEBI. Adequate measures have not been taken to upkeep the software system in the line of the Bombay Stock Exchange which has made effort to prevent any kind of mischief or mistake on the part of the members while entering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having failed to credit the STT to the account of the Central Government. Hence, it is not liable under the statute for any short-deduction of STT. 7. The Ld. CIT(A) after considering the entire facts, observed that there was a short-fall in collection of STT due to nonapplication of appropriate rate by NSE to exact nature of security transactions i.e. delivery based / non-delivery based. He also went a step further in holding that, the short collection by the NSE is in violation of section 100 r.w.s. 98 and it was the statutory duty of the NSE to collect the STT at the appropriate rates and despite coming to the knowledge of the assessee that STT has been shortcollected, it is taking false-façade of the exchange system / procedure which again has been build by the NSE only. If the exchange system fails to have sufficient checks and balances, then it cannot be held that, the short collection of STT is not the fault of the assessee, because, as per the law it has to collect proper STT. After referring to various sections of STT Act, he concluded that, liability to collect STT and deposit the same to the account of the Central Government is a strict liability irrespective of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh that member. He further pointed out that, Rule 3 also lays down that, where the equity shares unit purchased or sold by person on a trading day the same is determined in the netted settlement mode. Hence, where the two separate client codes are not there, then STT is computed on a netted settlement mode. After referring to these relevant provisions, he submitted that it is Rule 3 which prescribes and lays down the manner of computing the value of STT for the purpose of section 99, which exactly the assessee has strictly adhered to. The trading system of NSE has been strictly drawn in line with Rule 3 which determines the STT payable on the basis of 'client code' inputted by the member broker. The 'client code' is determined by the member broker and the NSE has no role or business in allotting the client codes. Thus, the client code is the most important aspect through which collection of STT is made and it is not in the hands of the NSE. Section 100 provides the mechanism for STT and crediting the amount to the Central Government. Thus, section 100(1) requires NSE to collect STT at rates specified in section 98 and accordingly, the STT chargeable is determined on the value of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there is no failure in the Exchange system for the purpose of computing STT liability and consequently no failure to collect the STT as required under section 100. The Exchange cannot collect what is not due to it as per the information provided by the member till the time of computation of STT. It cannot wait for infinite time to allow the member to identify his mistake ( for non-compliance of SEBI directives) and then communicate to the Exchange for correct computation of STT. As submitted, those clients who deal on behalf of FII's are required to put two client codes, one for purchase and another for sale, to ensure that the trades done by the them are not considered as squared off. In case where the member recognizes at a later stage, the mistake of putting one client code at the time of putting the order, he is also permitted to modify such client code within 45 minutes of time available after the close of the market hours. Once the same is done, the Exchange system computes the STT liability with delivery rates for different client codes and squared off rate for same client codes, and recovers the same from the members. Thus, he submitted that, there is no failure on the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock exchange; or (b) sale of a unit of an equity oriented fund to the Mutual Fund. The charge of security transaction tax has been provided in section 98, which along with the rates specified in the table reads as under: "99 On and from the commencement of this Chapter, there shall be charged a Securities transaction tax in respect of the taxable securities transaction specified in column (2) of the Table below, at the rate of specified in the corresponding entry in column (3) of the said Table, on the value of such transaction and such tax shall be payable by the purchaser or the seller, specified in the corresponding entry in column (4) of the said Table: Sl. No. Taxable securities transaction Rate Payable by 1 2 3 4 1 Purchase of an equity share in a company or a unit of an equity oriented fund, where- (a) the transaction of such purchase is entered into in a recognized stock exchange; and (b) the contract for the purchase of such share or unit is settled by the actual delivery or transfer of such share or unit. 0.075 per cent Purchaser 2 Sale of an equity share in a company or a unit of an equity oriented fund, where - (a) the transaction of such sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares or units purchased or sold in each trade in that equity share or unit executed by the person on that day, shall be multiplied by the price at which the trade is executed, to determine the trade value of each such trade; (ii) the aggregate trade value of all trades in the equity share or unit by the person on that day shall be arrived at by totalling the trade values determined under sub-clause (i); (iii) the aggregate trade value arrived at under sub-clause (ii), shall be divided by the total quantity of the equity share or unit traded by the person on that day, to determine the volume weighted average price of that equity share or unit for that person for that day; (iv) such volume weighted average price (rounded off to the nearest' paisa) shall be taken to be the value of the taxable securities transaction relating to the equity share or unit. (v) Explanation - For the purposes of this clause (a), the determination of the value of taxable securities transaction in a case where the equity share or unit is purchased or sold through a member of the stock exchange, shall be made with reference to the trades executed in the equity share or unit under a particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llect the securities transaction tax form every person who sells a unit to that Mutual Fund, at the rate specified in section 98 (3) The securities transaction tax collected during any calendar month in accordance with the provisions of sub-section (1) or sub-section (2), shall be paid by every recognized stock exchange or by the prescribed person in the case of every Mutual Fund, as the case may be, to the credit of the Central Government by the seventh day of the month immediately following the said calendar month. (4) Any recognized stock exchange or the prescribed person in the case of any Mutual Fund, who fails to collect the tax in accordance with the provisions of sub-section (1) or sub-section (2), shall, notwithstanding such failure, be liable to pay the tax to the credit of the Central Government in accordance with the provisions of sub-section (3) ". 11. Now, from the conjoint reading of aforesaid provisions, following proposition can be culled out: (i) The security transaction tax is charged at a specified rate in accordance with section 98. Such security transaction tax is payable by the purchaser and or seller and not by the Stock Exchange ; (ii) The value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e client codes in case of FIIs, then so far as assessee is concerned, no liability can be fastened on the NSE. The duty of the NSE so far as the provisions of Security Transaction Tax Act r.w. STT Rules are concerned, is to collect the tax at a correct rate of purchase and sale of shares executed through particular client code. If there is default by a member either at the time of collecting the STT in accordance with the client code; or certain additional amount of STT is to be collected on account of any compliance of SEBI Regulations, which has not been done without adherence of client code; then, the assessee cannot be held responsible or liability can be fastened under the provisions of section 98 to 100 r.w. Rule 3. The assessee can only ensure the determination of value of taxable security transaction purchase and sold through a client code and in accordance with the prescribed rate. Beyond that, there is no mechanism provided under the Act or Rules that assessee should mandatorily collect STT beyond the client codes. The SEBI issued the Circular to the National Stock Exchange for using two client codes, One for sale and Second for purchase transaction for those investors wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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