2024 (11) TMI 1459 - AT - Central Excise

Essential conditions to construe an activity to be trading - Nature of activity of putting surplus fund in the money in the mutual fund - duty paid on inputs capital goods and service tax paid on the input services - Demand of Cenvat Credit in terms of Rule 14 ibid read with Section 73 (1) of the Finance Act 1994 - imposition of penalty under Rule 15 (3) ibid read with Section 78 (1) ibid - HELD THAT - In order to construe an activity to be trading three essential conditions are required to be fulfilled namely there should be two parties and a market to purchase and sell the goods involved; there should be transfer of right/title involved from the seller to the buyer while selling the same; and there should be a fixed price known in advance while selling and buying for the said goods etc. In the case in hand the appellants had utilized their surplus fund in investing in the mutual funds market and whatever gain or profit derived out of that investment the benefit has only been accrued to the appellants and there is no involvement of any third party. Since the activities undertaken by the appellants in investing money in the mutual funds is exclusively for their own benefit without the investment of the element of sale or purchase of the goods it cannot be said that the activities undertaken in investing money in the mutual funds market should be considered as a trading activity. Thus we are of the view that the adjudged demands confirmed in the impugned order holding that the investment in mutual funds market should be considered as trading is not sustainable. We find that the Co-ordinate Bench of this Tribunal in the case of Ambuja Cements Ltd. Vs. Commissioner of Central Excise GST 2023 (5) TMI 806 - CESTAT MUMBAI has allowed the appeal in favour of the appellants therein holding that in absence of involvement of any activity of purchase and sale of units of mutual fund such activities cannot be considered as trading in order to fall within the ambit of preview of Rule 6 ibid. Therefore we are of the considered view that the impugned order passed by the learned adjudicating authority cannot be sustained on merits. Accordingly the impugned order is set aside and the appeal is allowed in the favour of the appellants.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this case are:

(a) Whether the activity of investing surplus funds by the appellants in mutual fund units constitutes a "trading activity" within the meaning of the Cenvat Credit Rules, 2004;

(b) Whether Cenvat Credit availed on input services, which was partly used for such investment activity, is liable to be disallowed under Rule 6 of the Cenvat Credit Rules, 2004;

(c) Whether the adjudicating authority was justified in confirming the demand of Cenvat Credit and imposing penalty under Rule 15(3) read with Section 78(1) of the Finance Act, 1994, on the ground that the investment in mutual funds was a trading activity;

(d) The applicability and interpretation of Rule 6 of the Cenvat Credit Rules, 2004, in the context of activities undertaken by the appellants.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Whether investment in mutual funds constitutes a "trading activity" and the consequent disallowance of Cenvat Credit under Rule 6

The Tribunal examined the nature of the activity of investing surplus funds in mutual fund units by the appellants, who are engaged in the manufacture of insulated electrical wires and cables. The department contended that such investment was a "trading activity," and hence, part of the Cenvat Credit availed on input services used for this activity was liable to be disallowed under Rule 6 of the Cenvat Credit Rules, 2004.

The Tribunal referred to the essential conditions that characterize a "trading activity." These include: (i) the presence of two parties and a market for purchase and sale of goods; (ii) transfer of right or title from the seller to the buyer; and (iii) a fixed price known in advance for the goods involved. The Tribunal noted that in the present case, the appellants invested surplus funds in mutual funds exclusively for their own benefit. There was no element of sale or purchase of goods involving a third party in the conventional sense of trading. The gains or profits from such investments accrued solely to the appellants.

Accordingly, the Tribunal held that the activity of investing in mutual funds did not satisfy the criteria of "trading activity" as envisaged under Rule 6. The absence of a market transaction involving transfer of goods or title at a fixed price meant that the investment activity cannot be classified as trading.

The Tribunal further relied on a precedent from a Coordinate Bench in Ambuja Cements Ltd. Vs. Commissioner of Central Excise & GST, Nagpur, where it was held that mere investment in mutual funds without involvement in purchase and sale of units does not constitute trading for the purposes of Rule 6.

Thus, the department's classification of the investment activity as trading, and the consequent demand for recovery of Cenvat Credit under Rule 6, was found to be unsustainable.

Issue (c): Justification of penalty imposed under Rule 15(3) read with Section 78(1) of the Finance Act, 1994

The penalty was imposed on the appellants on the premise that the Cenvat Credit availed was partly used for trading activities, which was not permissible. Since the Tribunal negated the classification of the investment activity as trading, the foundation for imposing penalty also failed.

Given the Tribunal's finding that the investment in mutual funds was not trading, the penalty imposed on the appellants was not justified. The penalty being contingent on the correctness of the demand, which was set aside, was consequently also set aside.

Issue (d): Interpretation of Rule 6 of the Cenvat Credit Rules, 2004

Rule 6 prohibits availing and utilization of Cenvat Credit in respect of inputs and input services used in activities other than manufacture of dutiable goods or provision of taxable services, including trading activities. The Tribunal emphasized the need for a strict interpretation of "trading activity" as per the rule and noted that not every investment or financial activity undertaken by a manufacturer would fall within the ambit of trading.

The Tribunal underscored that the activity must involve purchase and sale of goods in a market with transfer of title and a fixed price to qualify as trading. Mere investment in mutual funds, which is essentially a financial transaction without transfer of goods or title in the conventional sense, does not fall within the purview of Rule 6.

This interpretation aligns with the objective of Rule 6 to restrict Cenvat Credit to inputs and services used directly in manufacture or taxable services and not for activities outside the scope of manufacturing or taxable services.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"In order to construe an activity to be 'trading', three essential conditions are required to be fulfilled namely, there should be two parties and a market to purchase and sell the goods involved; there should be transfer of right/title involved from the seller to the buyer, while selling the same; and there should be a fixed price known in advance while selling and buying for the said goods etc."

"Since the activities undertaken by the appellants in investing money in the mutual funds is exclusively for their own benefit, without the investment of the element of sale or purchase of the goods, it cannot be said that the activities undertaken in investing money in the mutual funds market should be considered as a trading activity."

"We find that the Co-ordinate Bench of this Tribunal in the case of Ambuja Cements Ltd. Vs. Commissioner of Central Excise & GST, Nagpur, has allowed the appeal in favour of the appellants therein, holding that in absence of involvement of any activity of purchase and sale of units of mutual fund, such activities cannot be considered as trading in order to fall within the ambit of preview of Rule 6 ibid."

"Therefore, we are of the considered view that the impugned order passed by the learned adjudicating authority cannot be sustained on merits. Accordingly, the impugned order is set aside and the appeal is allowed in the favour of the appellants."

The core principles established are:

(i) Investment of surplus funds in mutual funds by a manufacturer does not constitute "trading activity" under Rule 6 of the Cenvat Credit Rules, 2004;

(ii) Cenvat Credit availed on input services used partly for such investment activity cannot be disallowed on the ground of trading activity;