2020 (3) TMI 567 - HC - Income Tax

Short deduction of Security Transaction Tax (STT) - Whether Tribunal was correct in holding that NSE had not committed any fault in collection of correct STT when infact section 100(1) of Securities Transaction Tax mandates the recognized stock exchange for collection and recovery of STT at the rates specified in section 98 of STT Act? - responsibility of member brokers of NSE to collect the correct STT on the transactions - penalty for failure to collect the said Security Transaction Tax - HELD THAT - STT is collected through a member broker under a particular client code. The client code is provided by the brokers and not by the stock exchange. Responsibility of the stock exchange is to ensure firstly that STT is collected as per Section 98; secondly it has been determined in accordance with Section 99 read with Rule 3 and Explanation thereto; and lastly such STT collected from the purchaser or seller is credited to the Central Government as provided under Section 100. Holding that respondent had not committed any default and that under the statute respondent was not liable for any alleged short deduction of STT Tribunal deleted the addition made on this count as modified by the first appellate authority. Consequently levy of interest and penalty were deleted. As advert to the explanation provided by one of nine brokers before the Assessing Officer. Morgan Stanley India Company Private Limited which was one of the broking companies dealing with FIIs stated before the Assessing Officer that for institutional clients the stock exchange provided facility of different client codes for purchase and sale trade for the same client to ensure that such trades were not netted. On occasions where client codes for institutional trades were not modified by the broker the trades were treated as squared off trades and a lower STT was levied. This resulted in the exchange charging a lower STT from the member broker while the member broker collected a higher delivery based STT from the client. We find no error or infirmity in the view taken by the Tribunal that under the statute respondent was not liable for any alleged short deduction of STT and therefore no fault can be prescribed to the respondent and to hold the respondent to be in default for short collection of STT.

Summary

Issues Involved:
1. Liability of National Stock Exchange (NSE) for alleged short deduction of Security Transaction Tax (STT).
2. Fault in collection of correct STT by NSE.
3. Responsibility of member brokers in collecting correct STT.
4. Deletion of penalty for failure to collect the said STT.

Issue-wise Detailed Analysis:

1. Liability of National Stock Exchange (NSE) for alleged short deduction of Security Transaction Tax (STT):
The Revenue appealed against the Tribunal's decision that NSE was not liable for any alleged short deduction of STT. The Tribunal held that the duty of NSE was to collect STT at the correct rate for transactions executed through a particular client code. If there was a default by a member broker in collecting STT correctly, NSE could not be held responsible. The Tribunal emphasized that NSE's responsibility was to ensure the determination of the value of taxable securities transactions purchased and sold through a client code and collect STT accordingly, beyond which there was no mechanism provided for NSE to mandatorily collect STT.

2. Fault in collection of correct STT by NSE:
The Tribunal found that NSE had collected STT in accordance with the provisions specified in Section 98 of the Finance (No.2) Act, 2004, and had determined the STT as per the mechanism laid down in Section 99(c) read with Rule 3 and its Explanation. The Tribunal concluded that NSE had complied with its statutory requirement to collect STT through client codes provided by member brokers and had credited the collected STT to the Central Government. Therefore, no fault could be ascribed to NSE for any alleged short deduction of STT.

3. Responsibility of member brokers in collecting correct STT:
The Tribunal noted that the client codes are provided by the member brokers and not by NSE. It was observed that if member brokers did not take separate client codes for FIIs, resulting in a lower STT being levied, NSE could not be held responsible. The Tribunal highlighted that NSE had issued a circular to its member brokers to use two client codes for investors whose transactions are to be settled through delivery mode only. Any failure by the brokers to comply with this could not be attributed to NSE.

4. Deletion of penalty for failure to collect the said STT:
The Tribunal deleted the penalty imposed on NSE, holding that since there was no shortfall of STT and NSE had not committed any default under the law, the penalty was unwarranted. The Tribunal's decision was based on the finding that NSE had collected and credited the STT as per the statutory requirements and any default in collecting correct STT was on the part of the member brokers.

Conclusion:
The High Court upheld the Tribunal's decision, stating that NSE was not liable for any alleged short deduction of STT and no fault could be ascribed to NSE for any short collection of STT. The appeal by the Revenue was dismissed, and it was concluded that no substantial question of law arose from the Tribunal's order.