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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 ..... nt 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 - Security Tax No. : 01/Mum/2010, Security Tax No. : 02/Mum/2010, Security Tax No. : 03/Mum/2012, Security Tax No. : 01/Mum/2013, Security T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctible STT which the learned assessing officer may determine on further enquiry as directed without appreciating that the same is beyond the scope of provisions of Finance (No.2) Act, 2004 and rues made thereunder . 3. The facts in brief are that, the assessee is a registered stock exchange and had filed its return of taxable securities transactions on 29.06.2006, declaring total taxable securities transactions at ₹ 6,99,10,47,72,669/- for the financial year 2005-06. The said return was selected for scrutiny and accordingly, notice under section 102(1) of STT Act was issued. During the course of the assessment proceedings, the AO made sample enquiry from 250 members / brokers. From the said enquiry, 9 broker members reported a total short collection of STT by the NSE at ₹ 2,80,78,444/-, as per the details incorporated by the AO at page 4, which for the sake of ready reference is reproduced below: S. No. Name of Broking Co. dealing with FIIs Total amt. of STT collected from FII clients (Rs.) Total amt. of STT recovered By NSE (Rs.) Shortfall in STT Recovers by NSE in respect of FII trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain 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. Therefore, it was essential that accounting system of the stock exchange should ensure adequate measures so as to collect STT from the FII transactions on delivery based transaction as mentioned in section 98 of STT Act. The reasons for discrepancy as sought from the brokers was on the basis of enquiry conducted by the AO which has been incorporated at Para 9 from pages 5 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ched 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 are not permitted to do square of trades, SEBI has permitted them to put two client codes for the same client in such cases. Further the Exchange vide its Circular No.NSE/INVG/2004/016 dated 30.09.2004, had communicated the contents of SEBI letter to all its members and have advised to comply with the same. (e) Hence those clients who dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 ₹ 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 their client codes. He rejected the assessee s contention that the Stock exchange cannot collect what is not due to it as per information provided by members during the time of computation of the STT. Even if the accounting system of assessee has under computed and under collected the STT in respect of FII transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-fa ade 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 the intention of the assessee. Accordingly, he upheld the action of the AO. However, he reduce the addition to the actual short-fall noted by the AO through his enquiry i.e. ₹ 2,80,78,444/- and accordingly, he restricted the addition on the same amount. 8. Before us, the Ld. Senior Counsel, Shri Arvind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 such taxable security transaction in the manner laid down in Proviso to section 99(c) r.w. Rule 3(a) r.w. Explanation thereto, whereby the value of taxable transaction is carried in the netted settlement mode. Though the SEBI has given direction to the NSE regarding usage of two client codes, that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 part of the assessee to collect STT as required under section 100 under Rule 3. 9. On the other hand, the Ld. DR strongly relied upon the order of the CIT(A) and submitted that, it was duty of the assessee to ensure that proper STT is collected and whether the Circular of the SEBI to allot se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is entered into in a recognized s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ognised stock exchange, shall be determined in the following manner, namely:- (a) where the equity share or unit is purchased or sold by a person on a trading day in the netted settlement mode,- (i) the quantity of shares 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction tax from every person, being a purchaser or a seller, as the case may be, who enters into a taxable securities transaction in that stock exchange, at the rates specified in section 88; (2) The prescribed person in the case of every Mutual Fund shall collect 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 afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This is evident from the fact that, all the STT have been collected through and under the client codes of the members. It is not the case that assessee has not collected the STT under the given client code. If a member/broker does not collect STT through client code or has not taken the separate 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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