2016 (4) TMI 910 - AT - Income Tax

NSE liability for alleged short-deduction of Security Transaction Tax STT - transaction of FIIs for which higher rates are applicable being delivery based transaction in respect of both purchases as well as sales - Held that - 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 whose transactions are to be settled through delivery only, specifically in the case of FIIs. If the broker or the member have not taken any separate client code, then the assessee cannot held responsible, because the assessee has already intimated / circulated that each and every broker or member should in such cases take two client codes. Any failure cannot be ascribed to the assessee, because, it is an undisputed fact that the client code is not provided by the assessee, but by the member brokers In case where the two separate client codes have not been taken for purchase and sale of shares for the same day and there in only one client code, then transactions are settled in the netted settlement mode, that is, squaring of the transaction and STT is calculated as per the netted settlement mode as prescribed under Rule 3. This netting off mode is not applicable in the case of FIIs in terms of SEBI regulations and Circular. If in some cases, there has been default by the Members brokers for not taking two separate client codes, then so far as assessee is concerned, it has not comitted any default under the provisions of the STT Act r.w. relevant rules, because what assessee is required to see is whether the transactions of purchase and sale has undertaken through particular client codes or not. Here in this case, the assessee has admittedly complied with this statutory requirement hence, we do not find any reason to ascribe any fault to the assessee or hold that be assessee committed and default to collect the correct STT. Thus, it is under the Statute NSE is not liable for any alleged short-deduction of STT. Accordingly, the addition which has been sustained by the CIT(A) to the extent stands deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Failure to collect the whole of the Securities Transaction Tax (STT) from institutional investors.
2. Enhancement of STT liability.
3. Levy of interest under section 104.
4. Directions for further enquiry and collection of STT.
5. Enhancement of STT assessment.

Detailed Analysis:

1. Failure to Collect the Whole of the STT:
The appellant-assessee, a registered stock exchange, was alleged to have failed to collect the entire STT from institutional investors. The AO's enquiry revealed a shortfall in STT collection amounting to ?2,80,78,444/- from nine broker members. The AO attributed this shortfall to the non-application of appropriate STT rates to certain Foreign Institutional Investors (FIIs) transactions, particularly those where purchases and sales occurred on the same day for the same scrips. The AO concluded that the NSE's accounting system failed to compute STT correctly for these transactions, leading to under-collection.

2. Enhancement of STT Liability:
The AO proposed an estimated shortfall of ?5 crores in STT collection, considering the likelihood of similar discrepancies in other transactions. The CIT(A) upheld the AO's findings but reduced the addition to the actual shortfall of ?2,80,78,444/-. The assessee argued that the responsibility for collecting STT lies with the purchaser or seller, as per section 98 of the STT Act, and not with the NSE. The NSE's system computes STT based on client codes provided by members, and any failure to use separate client codes for FIIs' transactions should not be attributed to the NSE.

3. Levy of Interest Under Section 104:
The CIT(A) confirmed the levy of interest under section 104, which the assessee contested. The assessee maintained that it had collected and credited STT to the Central Government's account as required under section 100. The failure to use separate client codes by members should not result in additional liability for the NSE.

4. Directions for Further Enquiry and Collection of STT:
The CIT(A) directed the AO to collect further information to determine any additional shortfall in collectible STT. The assessee argued that the CIT(A) lacked the authority to issue such directions, as it was beyond the scope of the Finance (No.2) Act, 2004.

5. Enhancement of STT Assessment:
The CIT(A) enhanced the STT assessment by holding that the NSE should pay any further shortfall determined by the AO upon further enquiry. The assessee contended that this enhancement was beyond the statutory provisions and that the NSE had complied with its obligations under the STT Act and Rules.

Tribunal's Findings:
The Tribunal observed that the responsibility for collecting STT lies with the purchaser or seller, as per section 98 of the STT Act. The NSE's role is to ensure that STT is collected based on the client codes provided by members. The Tribunal noted that the NSE had issued circulars to members, instructing them to use separate client codes for FIIs' transactions. The Tribunal found that the NSE had complied with its statutory obligations and that any failure to use separate client codes by members should not result in additional liability for the NSE.

The Tribunal concluded that the NSE could not be held liable for the alleged shortfall in STT collection, as it had collected STT based on the information provided by members. The Tribunal deleted the addition of ?2,80,78,444/- and allowed the assessee's appeals.

Conclusion:
The Tribunal held that the NSE had fulfilled its statutory obligations under the STT Act and Rules. The responsibility for any shortfall in STT collection due to the failure of members to use separate client codes for FIIs' transactions could not be attributed to the NSE. Consequently, the Tribunal deleted the addition of ?2,80,78,444/- and allowed the assessee's appeals, including the appeal against the levy of penalty under section 105A.