SUB BROKER IS NOT LIABLE TO PAY SERVICE TAX WHEN LIABILITY DISCHARGED BY MAIN STOCK BROKER

[Mr. M. GOVINDARAJAN]

                        Sec. 65(105)(a) of the Finance Act, 1994 ('Act' for short) defines the taxable service of stock broking as any service provided or to be provided to any person by a stock broker in connection with the sale or purchase of securities listed on a recognized stock exchange.

                        Sec 2(h) of Securities Contracts Regulation Act, 1956 defines the term 'securities'. Securities include-

·  Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

·  Derivative;

·  Units or any other instrument used by any collective investment scheme to the investors in such schemes;

·  Security receipt as defined clause 2(g) of Sec. 2 of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

·  Units or any other such instrument issued to investors under any mutual fund scheme;

·  Government securities;

·  Such other instruments as may be declared by the Central Government to be securities; and

·  Rights or interest in securities.

Sec.65(101) of the Act defines 'stock broker' as a person, who has either made an application for registration or is registered as a stock broker or made under the Securities and Exchange Board of India Act, 1992.

                        A stock broker plays a very important role in the secondary market helping both the seller and the buyer of the securities to enter into a transaction.   A sub broker is one who works along with the main broker and is not directly registered with the stock exchange as a member.   He acts on behalf of the stock broker as an agent or otherwise for assisting investors in buying, selling or dealing in securities through such stock brokers.

                        No stock broker or sub broker shall buy, sell or deal in securities unless he holds a certificate of registration granted by SEBI under SEBI (Stock broker and Sub broker) Rules, 1992.

                        The sub broker is not liable to pay service tax when discharged by stock broker.   This statement is verified with the aid of the following three case laws:

·  Vijay Sharma & Company V. Commissioner of Central Excise, Chandigarh - 2007 -TMI - 1628 - CESTAT, NEW DELHI;

·  Unique Investment Centre V. Commissioner of Central Excise, Chandigarh - 2007 -TMI - 2443 - CESTAT, NEW DELHI;

·  Shakti Securities V. Commissioner of Central Excise, Belgaum - 2008 -TMI - 4574 - CESTAT, BANGALORE

In 'Vijay Sharma & Company V. Commissioner of Central Excise, Chandigarh' (supra) the appellants are sub brokers of a main broker named Master Capital Services Ltd.,   The appellants received certain commissions from the main broker in connection with the brokerage undertaken by them.   Service tax demands have been confirmed against the appellants on the ground that their commission is liable to service tax as 'stock broker service'.   The appellants contended that the stock broker service is rendered only by the main broker.   The main broker pays service tax on the gross amount of commission received in connection with the sales and purchase of securities.  Therefore there is no justification to tax sub brokers separately.   The Revenue contended that the sub broker is specifically mentioned in the definition of brokers/stock brokers and therefore the commission of sub broker also attracted levy.   The tribunal held that sale and purchase of security in stock exchange is handled only by the main broker and the sub brokers are only taking the interested buyers to the main broker.   Therefore levy will fall only on the main broker who handled the sale and purchase of securities in the stock exchange.   The sub brokers are not acting as a broker in connection with the sale and purchase of securities in the stock exchange.   Their role is like any commission agent in a transaction.   The levy under the heading in question is limited to stock brokers and not to commission agents at large.   Therefore, levy is clearly not attracted in the case of sub brokers.

                        In 'Unique Investment Centre V. Commissioner of Central Excise, Chandigarh' (supra) the appellant had received remuneration from the broker on each transactions done through him which is a part of brokerage earned by the main broker from the sale/purchase of the securities of a client registered by the appellant sub broker.   The contention of the appellant is that the sub brokers never deal with the client on their own and the main broker is authorized to enter into agreements with the clients (investor) and issue contract notes, account statement, receipts and delivery of cheque, recovery of taxes etc.,   Therefore the commission from the investor will be charged by the stock broker (main broker) and the broker paid a portion of such commission to the sub broker for introducing clients to him.   The Revenue contended that the appellant had rendered taxable service in accordance with the provisions of Sec. 65(105)(a) of the Act.   The show cause notice dated 17.4.2006 issued to the appellant refers to the certificate of main broker who had paid a sum of Rs.3,45,461/- on account of sub brokerage from April 2005 to September 2005 but state that since the notice applicant is holding the independent service tax registration number for providing the stock broking service they are liable to discharge their service tax liability.   The tribunal held that it can not be the intention of the legislature.   Simply holding a registration cannot make a person liable to discharge a tax which otherwise does not become payable.

                        In 'Shakti Securities V. Commissioner of Central Excise, Belgaum' (supra) the appellants had filed refund claim on the ground that they have paid service tax twice for the period from 10.9.2004 to 31.3.2005.   It was pleaded that the main stock broker has already paid service tax and the assessee being a sub broker had inadvertently paid the tax assuming that their commission received from the main broker also attracts service tax.   Both the original authority and appellate authority rejected their plea and held that the payment made by the sub broker is as per law.   The appellants relied on 'Vijay Sharma & Company V. Commissioner of Central Excise, Chandigarh' (supra) and 'Unique Investment Centre V. Commissioner of Central Excise, Chandigarh' (supra).   The tribunal held that the sub broker is not liable to pay service tax when the service tax has been discharged by the main broker.