Priya Soparkar 1 1-4 itxa 1187-17-o IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL (IT) NO.1187 OF 2017 Pr.Commissioner of Income Tax-7 Appellant V/s. National Stock Exchange Respondent Mr.Suresh Kumar with Ms.Priyanka Tiwary and Ms.Sumandevi Yadav, Advocate for Appellant. Mr.J.D.Mistri, Senior Advocate with Mr.Atul K. Jasani for Respondent. CORAM : UJJAL BHUYAN & MILIND N. JADHAV, JJ. DATE : FEBRUARY 3, 2020 P.C.:- 1. Heard Mr.Suresh Kumar, learned standing counsel, Revenue for appellant and Mr.J.D.Mistri, learned senior counsel assisted by Mr.Atul K. Jasani, learned counsel for respondent. 2. This appeal has been preferred by Revenue under Section 260A of Income Tax Act, 1961 (briefly Act hereinafter) against order dated 4 th April, ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 2 1-4 itxa 1187-17-o 2016 passed by Income Tax Appellate Tribunal, Mumbai Bench B , Mumbai (briefly Tribunal hereinafter) in Security Tax Appeal No.02/Mum/2010 for financial year 2005-06. 3. In this appeal appellant has proposed following questions as substantial questions of law:- (i) Whether in facts and in circumstances of case and in law Tribunal was correct in holding that under statute National Stock Exchange (NSE) is not liable for any alleged short deduction of Security Transaction Tax (STT)? (ii) Whether in facts and in circumstances of case and in law 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 recognized stock exchange for collection and recovery of STT at rates specified in section 98 of STT Act? (iii) Whether in facts and in circumstances of case and in law Tribunal was correct in holding that it was responsibility of member brokers of NSE to collect correct STT on transactions, when infact these member brokers are of NSE itself and operate on NSE s platform? (iv) Whether in facts and in circumstances of case and in law Tribunal was correct in deleting penalty for failure to collect said Security Transaction Tax? ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 3 1-4 itxa 1187-17-o 4. appeal has arisen on following facts :- 5. For financial year 2005-06 respondent filed return of taxable securities transaction on 29 th June, 2006 declaring total taxable securities transaction at Rs.6,99,10,47,72,669.00. case was selected for scrutiny, whereafter notices were issued to respondent. 6. Be it stated that, respondent is National Stock Exchange of India Limited (NSE). In course of assessment proceeding Assessing Officer expressed apprehension that there was some under-collection of Securities Transaction Tax (STT) by respondent in respect of certain institutional investors like foreign institutional investors. Assessing Officer made enquiry on sample basis amongst brokers registered with respondent. According to Assessing Officer, there was discrepancy in total amount of STT collected by ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 4 1-4 itxa 1187-17-o brokers from their foreign institutional investors, atleast by nine brokers, and amount of STT collected by respondent. According to Assessing Officer, nine brokers had reported total of Rs.2,80,78,444.00 as short collection of STT by respondent from brokers pertaining to transactions entered into by foreign institutional investors (FIIs) through brokers. According to them, total amount of STT collected from their foreign institutional investor clients was Rs.2,79,27,48,914.00 whereas total amount of STT recovered by respondent was Rs.2,76,46,70,470.00, thus leading to shortfall of Rs.2,80,78,444.00. It was observed that figure of discrepancy pertaining to FIIs transaction was likely to be higher as discrepancies noticed by Assessing Officer was from amongst nine brokers which were only illustrative and not exhaustive. Assessing Officer therefore held that respondent had failed to take inbuilt measures to collect STT properly and accurately from members (brokers) as per requirement of Section 100 of Chapter VII of Finance (No.2) Act, 2004. Taking view that his ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 5 1-4 itxa 1187-17-o inquiry covered only 1/4th of total number of brokers registered with respondent, Assessing Officer called upon respondent to explain as to why bonafide estimate of Rs.5 crores of STT should not be paid by respondent which had escaped collection in its hand from brokers. After considering response of respondent Assessing Officer passed assessment order dated 28th March, 2008 raising STT collectable by respondent by additional amount of Rs.5 crores over and above STT collected and deposited by respondent during year under consideration. It was observed that Assessing Officer had kept option open to continue with inquiry and to amend assessment order if necessary since there was likelihood that actual figure of under collection of STT pertaining to FIIs transactions would be much more. Accordingly, amount of Rs.5 crores was added as additional STT payable by respondent and together with interest, amount payable was estimated at Rs.6,14,21,680.00. Assessing Officer further directed ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 6 1-4 itxa 1187-17-o initiation of penalty proceedings under Section 105(a) of Chapter VII of Finance (No.2) Act, 2004. 7. Respondent preferred appeal before Commissioner of Income Tax (Appeals)-13, Mumbai. By appellate order dated 1st December, 2009, Commissioner of Income Tax (Appeals) took view that liability to collect STT and to credit same to account of Central Government was strict liability which respondent had failed to discharge. Respondent had failed to collect due STT as per Section 100 read with Section 98 of Finance (No.2) Act, 2004. However, Commissioner of Income Tax (Appeals) noted that since actual discrepancy noted by Assessing Officer on account of shortfall of STT collected from brokers was Rs.2,80,78,444.00, Assessing Officer was directed to restrict addition on account of shortfall of STT to Rs.2,80,78,444.00. However, Assessing Officer was directed to collect information from other brokers to determine whether any further shortfall of collectable STT was there and to raise same accordingly. ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 7 1-4 itxa 1187-17-o Regarding initiation of penalty proceedings, it was observed that same would be decided at time of penalty proceedings. Thus, appeal of respondent was partially allowed. 8. Respondent carried matter in further appeal before Tribunal. said appeal was heard with several other appeals of respondent on same issue for different financial years as well as on incidental issue of imposition of penalty. In its appellate order dated 4th April, 2016, Tribunal posed question to itself as to whether respondent could be held liable for alleged short deduction of STT on certain transactions of FIIs for which higher rates are applicable being delivery based transactions in respect of both purchases as well as sales. After considering relevant provisions of Finance (No.2) Act, 2004, more particularly Sections 98, 99 and 100 as well as Explanation to Rule 3(a)(iv) of Security Transaction Tax Rules, 2004, Tribunal held that all STT were collected through and under client codes of ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 8 1-4 itxa 1187-17-o member brokers. Duty of respondent was to collect tax at correct rate of purchase and sale of shares executed through particular client code. If there is default by member either at time of collecting STT in accordance with client code or certain additional amount of STT was to be collected which had not been done, then respondent could not be held responsible or liability could not be fastened on respondent. Respondent could only ensure determination of value of taxable security transaction purchased and sold through client code and in accordance with prescribed rate. Beyond that there is no mechanism provided that respondent should mandatorily collect STT beyond client codes. Though there could be default by member brokers for not taking two separate client codes for sale and purchase but in so far respondent is concerned, it had not committed any default under law because what respondent was required to see was whether transaction of purchase and sale was undertaken through particular client code or not. Respondent had admittedly complied with ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 9 1-4 itxa 1187-17-o statutory requirement. Therefore, no default could be ascribed to respondent. Accordingly, addition as modified by Commissioner of Income Tax (Appeals) was deleted. In view of finding given in quantum proceedings that there was no shortfall of STT and that there was no further liability of STT to be paid by respondent, penalty levied was deleted. 9. Aggrieved, Revenue has preferred present appeal proposing above questions for consideration. 10. Mr.Suresh Kumar, learned standing counsel, Revenue referred to provisions of Sections 98, 99 and 100 of Finance (No.2) Act, 2004 and submits that on conjoint reading of aforesaid provisions it is evident that liability for payment of STT is squarely on respondent. He has also referred to table provided in Section 98 as well as columns thereto and submits that STT is charged as per rate provided in column (3) to table having regard to nature of transaction of equity shares and securities. Referring to Section 100 he ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 10 1-4 itxa 1187-17-o submits that every recognized stock exchange is mandatorily required to collect STT from every person being purchaser or seller who enters into taxable securities transaction in that stock exchange at rate specified under Section 98 and failure to collect and deposit STT at prescribed rate would invite consequences as provided in sub- section (4) to Section 100. He also placed reliance on circular dated 30.09.2004 issued by respondent to its members asking them to use two trading client codes for those investors whose transactions are to be settled only by delivery basis and submits that respondent ought to have ensured that members used proper code for correct collection of STT. He therefore submits that order passed by Assessing Officer as modified by Commissioner of Income Tax (Appeals) is fully justified. Tribunal erred in interfering with said decision. 11. On other hand, Mr.Mistri, learned senior counsel appearing for respondent submits that respondent only provides platform for carrying on of trading in ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 11 1-4 itxa 1187-17-o shares by registered brokers. Value of taxable securities transaction is settled as per client code and in so far allocation of client code is concerned, respondent has no role to play. FIIs were not given separate client code for intra-day buying and selling of securities by brokers who operated on their behalf. There was nothing that respondent could do about it. According to him, problem might have arisen because some brokers did not take two client codes separately for buying and selling of same scrip in intra-day transactions and further in not making correction of client codes in their respective system. He submits that in view of provisions contained in Section 98 read with Sections 99 and 100 of Finance (No.2) Act, 2004, respondent is mere collector of STT. It is not case of Revenue that respondent had defaulted in depositing STT collected to credit of Central Government account. He also submits that entire STT collected by respondent has been credited in account of Central Government. His contention is that millions of transactions take place in platform of ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 12 1-4 itxa 1187-17-o respondent during day. It is simply not possible on part of respondent to monitor each transaction or identify each transaction undertaken digitally on platform of respondent. If there is underpayment of STT, liability would be on broker and not on respondent. All that it ensures is that brokers pay prescribed rate of STT as per table to Section 98. He therefore submits that Tribunal had correctly decided issue in favour of respondent. That apart, finding returned by Tribunal is finding of fact and no substantial question of law arises therefrom. Therefore, appeal at instance of Revenue should be dismissed. 12. Submissions made by learned counsel for parties have been duly considered. 13. Chapter VII of Finance (No.2) Act, 2004 deals with Securities Transaction Tax (already referred to as STT). Section 97(11) defines securities transaction tax to mean tax leviable on taxable securities ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 13 1-4 itxa 1187-17-o transactions under provisions of said chapter. As per Section 97(13), taxable securities transaction has been defined to mean transaction of purchase or sale of equity shares in company or derivative or unit of equity oriented fund or unit of business trust entered into in recognized stock exchange; sale of unlisted equity shares by any holder of such shares under offer for sale to public included in initial public offer and where such shares are subsequently listed on recognized stock exchange; or sale of unlisted units of business trust by any holder of such units which were acquired in consideration of transfer referred to in clause (xvii) of Setion 47 of Income Tax Act, 1961 under offer for sale to public included in initial offer and where such units are subsequently listed on recognized stock exchange; or sale of unit or equity oriented fund to mutual fund. 14. Section 98 is charging section providing for charge of STT. It says that on and from commencement of chapter dealing with STT, there ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 14 1-4 itxa 1187-17-o shall be charge of STT in respect of taxable securities transactions specified in column (2) of table forming part of Section 98 at rate specified in corresponding column (3) on value of such transaction and such STT shall be paid either by purchaser or by seller as specified in corresponding entry in column (4). glance at table would show that at Sr.No.1 is mentioned purchase of equity share in company or unit of business trust where transaction of such purchase is entered into in recognized stock exchange and contract for purchase of such share or unit is settled by actual delivery or transfer of such share or unit. For this category of taxable securities transaction rate is 0.1% which is to be paid by purchaser. Similarly, at Sr.No. 2 transaction is of sale of equity share in company or unit of business trust. Here also rate is same but is required to be paid by seller. Sr.No.3 deals with sale of equity share in company or in unit of equity oriented fund or unit of business trust where transaction of such ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 15 1-4 itxa 1187-17-o sale is entered into in recognized stock exchange and contract for sale of such share or unit is settled otherwise than by actual delivery or transfer of such share or unit. In case of such transaction rate of STT is 0.025 % and is required to be paid by seller. 15. From above, it is seen that there is difference in rate between transactions at Sr.Nos.1 and 2 as above and Sr. No.3. 16. Before deliberating on this aspect further, we may also refer to other provisions of Chapter VII of Finance (No.2) Act, 2004. 17. Section 99 provides value of taxable securities transaction. 18. Section 100 deals with collection and recovery of STT. Sub-section (1) says that every recognized stock exchange shall collect STT from every person being purchaser or seller, as case may be, who enters ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 16 1-4 itxa 1187-17-o into taxable securities transactions in that stock exchange at rates specified in Section 98. As per sub- section (3), STT collected during any calendar month shall be paid by every recognised stock exchange to credit of Central Government by seventh day of month immediately following said calendar month. In case of failure to collect STT, it shall be liable to pay same to credit of Central Government under sub- section (4). 19. Section 101 requires every recognized stock exchange to file return within prescribed period and in prescribed manner setting forth such particulars as may be prescribed in respect of all taxable securities transactions entered into during such financial year in that stock exchange. 20. Section 102 provides for making of assessment order by Assessing Officer. recognized stock exchange who submits return under Section 101 is construed to be assessee for this purpose. ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 17 1-4 itxa 1187-17-o 21. Section 104 provides for interest on delayed payment of STT. 22. While as per Section 105 assessee is liable to pay penalty for failure to collect or pay STT, Section 108 clarifies that no order imposing penalty shall be made unless assessee has been given reasonable opportunity of being heard. 23. Section 114 empowers Central Government to make Rules for carrying out provisions of chapter. 24. In exercise of powers conferred by sub-section (1) read with sub-section (2) of Section 114 of Finance (No.2) Act, 2004, Central government has made set of rules for carrying out provisions of Chapter VII of said Act relating to STT called Securities Transaction Tax Rules, 2004 (briefly Rules hereinafter). Rule 3 deals with value of taxable ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 18 1-4 itxa 1187-17-o securities transaction. As per explanation to clause (a)(iv) of Rule 3, determination of value of taxable securities transaction in case where equity share or unit is purchased or sold through member of stock exchange shall be made with reference to trades executed in equity share or unit under particular client code through that member. 25. careful reading of above explanation would indicate that for determination of value of taxable securities transaction what is relevant is that determination would be with reference to trades executed in equity share or unit under particular client code through concerned member (broker). 26. Having noticed relevant legal provisions as above, it would be apposite to examine as to how Tribunal dealt with matter. 27. After considering entire gamut of facts Tribunal summed up main issue as to whether ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 19 1-4 itxa 1187-17-o respondent could be held liable for alleged short deduction of STT on certain transactions of FIIs for which higher rates were applicable being delivery based transactions in respect of both purchases as well as sales. After referring to various provisions, Tribunal summed up legal propositions in following manner:- 11. Now, from conjoint reading of aforesaid provisions, following proposition can be culled out: (I) security transaction tax is charged at specified rate in accordance with section 98. Such security transaction tax is payable by purchaser and / or seller and not by Stock Exchange; (ii) value of taxable security transaction has to be determined in accordance with section 99 which provides that, value of taxable security transaction shall be price at which such securities are purchased or sold and same has to be determined, which is as per proviso; (iii) Proviso below clause (c) of section 99 in turn empowers Board to notify rules and method for determining price of such securities; (iv) In pursuance and in accordance with section 99(c), Rule (3) has been notified which prescribes, how security transaction tax is to be determined; (v) Clause (a) of Rule 3 provides for determination of STT in case where equity shares or unit is purchased or sold by person ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 20 1-4 itxa 1187-17-o on trading day in netted settlement mode; (vi) Explanation to clause (a) provides that, determination of STT which is purchased or sold through Member of stock exchange shall be made with reference to trade executed in equity share or unit under particular client code through that member. 28. Having culled out propositions as above, Tribunal held as under: 12. Here in this case, there cannot be any dispute that assessee had collected STT in accordance with provisions specified in section 98, which has been determined as per mechanism laid down in section 99(c) r.w. Rule 3 and Explanation thereto. This is evident from fact that, all STT have been collected through and under client codes of members. It is not case that assessee has not collected STT under given client code. If member / broker does not collect STT through client code or has not taken separate client codes in case of FIIs, then so far as assessee is concerned, no liability can be fastened on NSE. duty of NSE so far as provisions of Security Transaction Tax Act r.w. STT Rules are concerned, is to collect tax at correct rate of purchase and sale of shares executed through particular client code. If there is default by member either at time of collecting STT in accordance with 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, assessee cannot be held responsible ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 21 1-4 itxa 1187-17-o or liability can be fastened under provisions of section 98 to 100 r.w. Rule 3. assessee can only ensure determination of value of taxable security transaction purchase and sold through client code and in accordance with prescribed rate. Beyond that, there is no mechanism provided under Act or Rules that assessee should mandatorily collect STT beyond client codes. SEBI issued Circular to 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 case of FIIs. If broker or member have not taken any separate client code, then assessee cannot be held responsible, because assessee has already intimated / circulated that each and every broker or member should in such case take two client codes. Any failure cannot be ascribed to assessee, because, it is undisputed fact that client code is not provided by assessee, but by member brokers. In case where two separate client codes have not been taken for purchase and sale of shares for same day and there is only one client code, then transactions are settled in netted settlement mode, that is, squaring of transaction and STT is calculated as per netted settlement mode as prescribed under Rule 3. This netting off mode is not applicable in case of FIIs in terms of SEBI regulations and Circular. If in some cases, there has been default by Members brokers for not taking two separate client codes, then so far as assessee is concerned, it has not committed any default under provisions of STT Act r.w. relevant rules, because what assessee is required to see is whether transactions of purchase and sale has undertaken through particular client ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 22 1-4 itxa 1187-17-o codes or not. Here in this case, assessee has admittedly complied with this statutory requirement hence, we do not find any reason to ascribe any fault to assessee or hold that be assessee committed and default to collect correct STT. Thus, it is under Statute NSE is not liable for any alleged short-deduction of STT. Accordingly, addition which has been sustained by CIT(A) to extent of Rs.2,80,78,444/- stands deleted. 29. Thus Tribunal held that STT is charged at specified rate in accordance with Section 98. STT is payable either by purchaser or by seller and not by stock exchange. Value of taxable securities transaction has to be determined in accordance with Section 99 and as per proviso thereto. Rule 3 of Rules including Explanation thereto have been notified prescribing how value of STT is to be determined. For determination of STT which is purchased or sold through broker registered with stock exchange, reference has to be made to trade executed under particular client code of member broker. Thus, STT is collected through member broker under particular client code. client code is provided by brokers and not by stock exchange. Responsibility of ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 23 1-4 itxa 1187-17-o 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 purchaser or seller is credited to Central Government as provided under Section 100. 30. Tribunal further held that stock exchange i.e. respondent can only ensure determination of value of taxable securities transaction purchased and sold through client code at prescribed rate. However, there is no mechanism provided enabling respondent to collect STT beyond client code. 31. Tribunal also noted that Securities Exchange Board of India (SEBI) had issued circular to respondent for using two client codes, one for sale and other for purchase in respect of those investors like FIIs whose transactions are to be settled through delivery mode only pursuant to which respondent had issued circular dated 30.09.2004 to its member brokers to use two ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 24 1-4 itxa 1187-17-o client codes. If broker had not taken any separate client code then stock exchange cannot be held responsible. Such failure could not be ascribed to respondent because client codes were not provided by respondent but by member brokers. If in some cases there had been default by member brokers in not taking two separate client codes, then so far respondent is concerned it had not committed any default because what respondent was required to see was whether transactions of purchase and sale were undertaken through particular client codes or not. Respondent had admittedly complied with statutory requirement. 32. Tribunal also returned finding of fact that STT collected by respondent were through and under client codes of member brokers and collected STT had been credited into account of Central Government. ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 25 1-4 itxa 1187-17-o 33. Holding that respondent had not committed any default and that under statute respondent was not liable for any alleged short deduction of STT, Tribunal deleted addition made on this count as modified by first appellate authority. Consequently, levy of interest and penalty were deleted. 34. To buttress what has been discussed above, we may advert to explanation provided by one of nine brokers before Assessing Officer. Morgan Stanley India Company Private Limited which was one of broking companies dealing with FIIs stated before Assessing Officer that for institutional clients stock exchange provided facility of different client codes for purchase and sale trade for same client to ensure that such trades were not netted. On occasions where client codes for institutional trades were not modified by broker, trades were treated as squared off trades and lower STT was levied. This resulted in exchange charging lower STT from member broker ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Priya Soparkar 26 1-4 itxa 1187-17-o while member broker collected higher delivery based STT from client. 35. In such circumstances and on thorough consideration, we find no error or infirmity in view taken by Tribunal that under statute respondent was not liable for any alleged short deduction of STT and therefore, no fault can be prescribed to respondent and to hold respondent to be in default for short collection of STT. 36. Consequently, we do not find any merit in appeal. No substantial question of law arises from impugned order passed by Tribunal. 37. Resultantly, appeal is dismissed. No cost. (MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.) . ::: Uploaded on - 03/03/2020 ::: Downloaded on - 14/03/2020 11:53:58 ::: Pr. Commissioner of Income-tax-7 v. National Stock Exchange