TaxTMI 
TaxTMI 
2001 (2) TMI 957
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....lidity of Regulation 10 of the Securities & Exchange Board of India (Stock Brokers and Sub-brokers) Regulations, 1992 read with Schedule III thereof as also letters dated 7-11-1992 and 7-1-1993 issued by the Securities & Exchange Board of India (SEBI) were filed in various High Courts in the country. On a transfer petition for consolidating these cases being filed before this Court by the Respondent No.1, this Court by its order dated 10-12-1999 directed that one such Writ Petition C No. 126 of 1993 pending before the Bombay High Court be transferred to this Court. By the said order, this Court also stayed other proceedings pending in the other High Courts but gave liberties to the concerned parties to file intervention application in the above transferred case. 2. On 31-1-1992, the President of India in exercise of the powers conferred upon him by article 123(1) of the Constitution of India was pleased to promulgate the Securities & Exchange Board of India Ordinance, 1992. This Ordinance was subsequently replaced by the Securities & Exchange Board of India Act, 1992 ('the Act'). The Act was given retrospective operation with effect from 30-1-1992. Section 3 of the Act provided ....
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....de fee for registration as underwriters also. During the 5 years period there will be no annual fee. Each exchange may choose either Option A or Option B and collect fees accordingly from all its members and sent their application forms to SEBI within the date stipulated already. The one time registration fee for sub-brokers will be uniform at Rs. 5,000. In addition, the sub-brokers will require to pay an annual fee of Rs. 1,000 for renewal or registration." 5. As could be seen from the above, there was substantial change in the new proposal made by the Board. It proposed to reduce the initial fee for registration by 50 per cent with more instalment facility. In effect the earlier demands or registration fee of Rs. 2.5 lakhs. Rs. 1.5 lakhs and Rs. 50,000 respectively on different categories of members were brought down to Rs. 1.45 lakhs, Rs. 87,000 and Rs. 29,000 respectively. Even to this reduced offer of the Board, the members of the Stock Exchanges and the stock brokers had their opposition which is evident from the letter dated 25-4-1992 addressed to the Finance Minister of India by the Presidents of all the 22 Stock Exchanges which are recognised and regulated by the ....
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....ertificate, whereupon the stock broker shall cease to buy, sell or deal in securities as a stock-broker." Schedule III states as under :- 'I. Fees to be paid by the Stock-broker.- 1. Every stock-broker shall subject to paragraphs 2 and 3 of this Schedule pay registration fees in the manner set out below : (a )Where the annual turnover does not exceed rupees one crore during any financial year, a sum of rupees five thousand for each financial year; or (b)Where the annual turnover of the stock-broker exceeds rupees one crore during any financial year, a sum of rupees five thousand plus one hundredth of one per cent of the turnover in excess of rupees one crore for each financial year; (c )After the expiry of five financial years from the date of initial registration as a stock-broker, he shall pay sum of rupees five thousand for a block of five financial years commencing from the sixth financial year after the date of grant of initial registration to keep his registration in force. 2. Fees referred to in clauses (a ) and (b) of paragraph 1 above shall be paid- (a)in respect of the financial year 1992-93 within one month of the commencement of these regulations....
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....e case of the parties came to the conclusion that the fees levied by the Board was reasonable. Having found no beneficial response to their grievances from the Government of India and the Board, aggrieved parties filed various writ petitions in the different High Courts, as stated above. One such writ petition was Writ Petition No. 126 of 1993 filed by the BSE Brokers Forum, Bombay before the High Court of Bombay. This petition by the abovesaid order of transfer of this Court is now before us as Transferred Case C No. 20 of 2000. 11. In this said petition, the petitioners contend that there are at present 491 stock-brokers operating from its exchange out of which more than 460 stock-brokers are members of the first petitioner society. They contend that the registration fee sought to be levied by the Board on stock-brokers for the purpose of registration is ex facie illegal and void ab initio being ultra vires of the Act and the Rules and the demand is without authority of law being a tax in the guise of a fee which is ultra vires article 265 of the Constitution. They also contend that the said levy is discriminatory, arbitrary, excessive and ultra vires articles 14 and 19(1)(g).....
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....over of theirs and their classification vis a vis other intermediaries is an unreasonable classification. It contends that it is a reasonable classification taking into account the object of the Act. They, further, contended that when earlier a proposal was made to levy a flat fee the brokers opposed the same strongly, hence, the said decision to levy flat fee had to be withdrawn. They denied that Regulation 10 of Schedule III to the Regulations is either ultra vires of the Act or unconstitutional. Justifying the fee levied by them the Board contended that it had to render multifaceted and multitude of services contemplated under section 11(2) which included the following mandatory duties under the Act : "(a) regulating the business in stock exchanges and any other securities markets; (b)registering and regulating the working of stock-brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner; (c )registering and regulating the working of collective investmen....
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....well as brokers inter se. (g)To inspect the records of the brokers and stock exchange from time to time to prevent malpractices." 14. It is also contended that from the facilities that will be provided by the Board, the brokers would stand to benefit a great deal and that the Board intends to provide improved system of the trading which would fetch larger income to the brokers, by regulating the system the Board contends the inflow of foreign investment in the country also would increase substantially. According to the Board, the money that will be received by the levy would be reasonably sufficient to meet its expenses arising out of its statutory obligations. It specifically denied that the levy is a registration fee simpliciter but the same includes a fee required for establishing the necessary infrastructure for fulfilling and maintaining the objectives of the Act. It also disputed the figures relied upon by the petitioners to controvert the argument that the collection from the levy far exceeded the requirement of funds by the Board. It also denied that imposition of fee on the basis of turnover was either vague, unreasonable, arbitrary or discriminatory. It contends tha....
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....iting fraudulent and unfair trade practices relating to securities markets; (vii) promoting investors' education and training of intermediaries; (viii) prohibiting insider trading in securities; (ix) regulating substantial acquisition of shares and take-over of companies; (x) collection of information, inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market and other intermediaries and self-regulatory organisations in the securities market; (xi) performing such other functions as are delegated to it by the Central Government; (xii) conducting research for the above purposes; (xiii) providing necessary information for the efficient discharge of the functions of the organisations with securities markets etc. The said Board is also vested with certain powers of the civil courts under the Code of Civil Procedure, 1908 in regard to discovery, production, summoning and enforcing the attendance of persons and inspection of books, registers etc. Section 11(2)(k) empowers the Board to levy fees or other charges for carrying out the purposes enumerated in section 11. Section 12 requires the stock-brokers, sub-broke....
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....e paid is fixed under Schedule III of the Regulations as provided under the Act. Therefore, there is no room to attach the levy on the ground that the same is not authorised by law. 19. The petitioners contend that it is clear from the demand that what is demanded by the Board from them is a fee under section 12(2) which is a registration fee simpliciter. They support this contention by pointing out that the application for registration has to be made in Form 'A' and the registration certificate is issued in Form 'D', which are statutory forms and which shows that these Forms are issued under Regulations 3 and 6 which are referable only to section 12. Therefore, they contend that the Board cannot now contend that the impugned fee is collected for any purpose other than for registration. 20. In reply on behalf of the Board, it is contended that though the demand is termed as registration fees, as a matter of fact, the fee that is collected is a combination of a regulatory fee as well as a registration fee as contemplated under sections 11(2)(k) and 12 respectively. They also point out that, as a matter of fact, the collection from this levy is credited to a fund created under ....
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....which can even remotely be equated to the quantum of the levy. They also contend that the amount collected as fee is used as a general fund by the Board for its various activities which has no nexus with the services to be rendered to the contributories. Hence, the impugned levy cannot be treated even as a regulatory fee. 23. On behalf of the Board, it is contended that a levy being a regulatory-cum-registration fee, the quid pro quo required is very minimal and that it is entitled to levy and collect the same for meeting out the various activities of the Board required to be performed under the Act and the fact that the benefit from such acts of the Board also goes to non-contributories of the fee, would not deviate from the fact that the levy is a fee and not a tax. The Board also contends, the fact that the amount so collected is credited to a general fund and is utilised for the capital and revenue expenditures of the Board also will not change the nature of the levy so long as such collection, as a matter of fact, is utilised solely for the purpose of the activities of the Board authorised under the Act. 24. The argument of the petitioners in regard to the requirement of....
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....t was more in the nature of a tax primarily in view of the fact that the collection so made was being utilised not for fulfilling the objects of the Act under which the collection was authorised but for the general requirement of the State's functions. 27. Based on these judgments, the petitioners contend that the Board after collecting huge sums of money by way of impugned fee, was not rendering them services co-relatable to the levy but was utilising the same for the benefit of the persons who were not contributories to the levy and the levy in question being a compulsory exaction having penal consequences, the same is not a fee but a tax in the garb of fee. 28. A lot of ice has melted in the Himalayas after rendering the judgments in the above-cited cases so also there has been see changes in the judicial thinking as to the difference between a tax and a fee since then. 29. This Court in the case of Srinivasa General Traders v. State of Andhra Pradesh [1983] (4) SCC 353 has taken the view that the distinction between a tax and a fee lies primarily in the fact that a tax is levied as part of a common burden, while a fee is for payment of a specific benefit or privilege a....
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....reasonable and sufficient correlation between the levy of fee and the services rendered by the Textiles Committee. It further held that when the levy of the fee is for the benefit of the entire textile industry, there is sufficient quid pro quo between the levy recovered and the services rendered to the industry as a whole. 32. In a more recent case of Commissioner & Secretary to Government Commercial Taxes & Religious Endowments Department v. Sree Murugan Financing Corpn. Coimbatore [1992] (3) SCC 488, this Court after taking into consideration the financial involvement of general public in the chit funds, observed that the object of the Act obviously was to protect the interest of the subscribers and more the number of subscribers meant more the burden on the authorities under the Act and as a consequence more fee is required to meet the expenditure. Taking note of the human expectation of winning a draw or a bid at the auction and becoming rich overnight mostly by the lower-middle class and the poor who invest their hard-earned money in such chit funds, this Court held that a situation like that makes the levy a regulatory measure since the collection of such funds from such ....
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....e of which we have already made reference, held that a licence fee may be either regulatory or compensatory. When a fee is charged for rendering specific services, a certain element of quid pro quo must be there between the service rendered and the fee charged so that the licence fee is commensurate with the cost of rendering the service although the exact arithmetical equivalence is not expected. It held, however, that is not the only kind of fee which can be charged. Licence fees can also be regulatory when the activities for which a licence is given require to be regulated or controlled. The fee which is charged for regulation of such activity would be validly classifiable as a fee and not a tax although no service is rendered. An element of quid pro quo for levy of such fee is not required although such fees cannot be excessive. 37. As noticed in City Corpn. of Calicut's case (supra), the traditional concept of quid pro quo in a fee has undergone considerable transformation. From a conspectus of the ratio of the above judgments, we find that so far as the regulatory fee is concerned, the service to be rendered is not a condition precedent and the same does not lose the chara....
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....ected. It further contends that, as a matter of fact, the entire amount collected by the Board is required only for the purpose of fulfilling its statutory obligations. Accordingly to the Board, as per the levy permissible under Schedule III of the Regulations, the Board is likely to collect from the brokers of all Stock Exchanges including that of National Stock Exchange for the period between 1992-93 to 1999-2000 a total sum of Rs. 418.57 crores and from intermediaries other than brokers for the said period a sum of Rs. 126.96 crores; and from 2001 onwards its income by way of fee from approximately 9000 brokers would be of the order of approx. Rs. 90 lakhs per annum, and from the intermediaries it would be to the tune of Rs. 25-30 crores per annum, and in regard to its expenditure, the Board has given the following particulars : "Expenditure S. No. Particulars Amount in crores 1. Amount already spent during 1991-92 to 1999-2000 (Revenue & Capital) 193.00 3. Budget estimates for 2000-2001 (i) Office Premises Rs. 99.20 Crores (ii) Residential Premises Rs. 90.00 Crores ....
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....ce of the obligations cast on the Board and over and above all, it has the obligation to perform such functions as are delegated to it by the Central Government under the SCR Act, 1956. It is seen that in furtherance of these requirements of the Statute, the Board requires substantial sums of money towards capital expenditure in the form of acquiring office premises, residential premises, office equipments and to provide the necessary facilities for inducting the information technology in its day-to-day functions. It is to be noticed that the Board has to control and regulate 23 stock exchanges all over India which have more than 10,000 listed companies, 9,500 brokers, 5,500 sub-brokers, 250 merchant brokers with similar number of Registrars to the Issue, share transfer agents, more than 300 depository participants and other categories of intermediaries. From the material supplied by the Board, it is to be noticed that the total market capitalisation is over 8,00,000 crores. Apart from this, it is the case of the Board that it has to regulate 39 mutual funds involving 300 schemes with a Net Asset Value (NAV) of Rs. 1 lakh crores. The Board has also to deal with the entities which r....
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....Court has to investigate while examining a challenge of this nature is to see what is the primary object of the Regulations for which the fee is being collected and find out whether the Regulation in question is in public interest or not. Once the levy is in public interest and connected with the larger trade in which the contributories are involved then confining the services only to the contributories does not arise. As has been held by this Court in City Corpn. of Calicut's case (supra). Applying the said principle, we are of the opinion that since the Amount collected under the impugned levy is being spent by the Board on various activities of the stock and securities market with which the petitioners are directly connected, the fact that the entire benefit of the levy does not accrue to contributories, i.e., the petitioners would not make the levy invalid. 40. The next contention of the petitioners that the Board cannot be permitted to levy the fee for its capital expenditure should also meet with the same fate. This Court in Salvation Army's case (supra) has specifically held 'The expenditure in constructing buildings for locating the head office and regional offices and t....
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.... Board would be on brokers' related services and from amongst all the players in the share market brokers form a distinct and separate class as compared to others including other intermediaries. Therefore, in our opinion, there is nothing wrong in either classifying the brokers as a separate class for the subject of levy based on their annual turnover because the volume of transaction of the brokers has a direct bearing on the regulatory expenses of the Board. Hence, this classification has a direct nexus with the object to be achieved. 42. Another major issue in controversy in this case pertains to the imposition of impugned fee on the basis of the annual turnover of the brokers. The petitioners contend that assuming that the respondents had the authority in law to levy the fee under challenge, the same could not have been levied on the basis of the annual turnover of the brokers because such levy would amount to a tax on turnover. They also contend that the definition of 'annual turnover' found in Explanation III of the regulations is vague, imprecise, irrelevant and is over-inclusive. They contend that by virtue of such definition, every transaction of the brokers; be it a ca....
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....levy of fee based on 'annual turnover' of a stock broker is not a new phenomenon and the same is prevalent even in countries like United States of America, Hong Kong etc. They refuted the allegation that the definition of 'annual turnover' as found in Schedule III to the Regulations is vague, imprecise, irrelevant or over-inclusive. 44. It cannot be disputed that the 'annual turnover' of a broker is not the subject-matter of the levy but is only a measure of the levy. In other words, the fee is not being levied on the turnover as such but the fee is being levied on the brokers making their annual turnover as a measure of the levy which is a fee for regulating the activities of the securities market and for registration of the brokers and other intermediaries in the said market. Therefore, it is futile to contend that such levy would be either a tax or a fee on turnover. It is a settled principle in law that if the State has the authority to impose a levy then it has a wide discretion in choosing the measure of levy provided, of course, it withstands the test of reasonableness. Many levies may have a similar measure but by such similarity in the measure, the levies do not become ....
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.... levy pertaining to certain specific transactions which are treated as part of the turnover. It has recommended that for 'jobbing transactions' the scale of fees may be reduced to One Two hundredth of 1 per cent, and in regard to carry forward, renewal or badla transactions, the off-setting entries made by the Exchange, may not be counted as part of the turnover, and further on the Government securities, PSU Bonds and Units, the turnover will have to be calculated separately and a fee of one thousandth of one per cent may be charged on such turnover than the present scale of one hundredth of one per cent. It has also recommended that the activities such as underwriting and collection of deposits should not be taken into account for the purpose of calculating the turnover of the brokers. These recommendations of the Committee were, as a matter of fact, accepted by the Government of India also but as on date, the necessary changes have not been brought about by the Board in its Regulations. Consequently, to the extent of the recommendations made by the Expert Committee, we are of the opinion that the Board is bound to bring about corresponding changes so as to remove the anomalies po....
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....petitioners and the Government of India had accepted the same and the Board has, in principle, agreed to implement that report and not because Bhatt Committee report is more acceptable to us than Justice Mody Committee Report. 48. Lastly, on behalf of the trading members of the National Stock Exchange it is contended that they are not the members of the said Stock Exchange so as to bring them within the ambit of the levy. This argument is based on the premise that it is only a full-fledged member of a stock exchange who can be called upon to be registered under section 12(2) and not any other member of the stock exchange. They contend that the National Stock Exchange has only institutional members who are treated as full-fledged members and all others are only trading members who do not have any right and obligations expected of a member of the stock exchange. It is also contended that under the Rules and Regulations, a stock broker to be registered as such under the Act has to be a regular member of the Stock Exchange and since the said Rules and Regulations of the Board do not recognise a trading member as a member of the Stock Exchange, they cannot be brought within the net o....