2025 (5) TMI 156 - AT - Service Tax

Demand of tax along with interest and equal penalty under Rule 15(3) of Cenvat Credit Rules 2004 (CCR) read with section 78 of the Finance Act 1994 (Act) - availed irregular Cenvat Credit on exempted services and on certain inputs in relation to supply and installation of e-boarding facility - transactions of sale and purchase of mutual fund units - appellants found to be providing both exempted service as well as dutiable service - HELD THAT - We note that the Coordinate Bench at Delhi in the case of M/s Seigwerk India Pvt Ltd Vs CCGST 2025 (3) TMI 1066 - CESTAT NEW DELHI dealing in similar issue inter alia held that subscription and redemption of liquid mutual fund units cannot be termed as trading of goods and therefore would not fall under the exempted service under section 66D(e) of the Act. The activity to classify as exempted service under Rule 2(e) of CCR needs to be qualified as service as defined under section 65B(44) of the Act meaning thereby that service is an activity carried out by a person for another for consideration and includes a declared service but excludes a transfer of title in goods or immovable property by way of sale gift etc. Therefore the activity of investment in mutual fund does not involve the presence of a service rendered by a service provider towards a recipient of service for some consideration. We find much force in this judgment as the ground taken to arrive at the conclusion is that in order to become an exempted service the activity has to be first a service in terms of section 65B(44). Thus we find that in the present factual matrix there is no trading of security and therefore the very charge for applying Rule 6 could not be sustained. Moreover we also find that in terms of definition for service the appellants cannot be considered as provider of service and therefore it cannot be said that they were engaged in providing any service to any other person for a consideration. Therefore on both these counts demand cannot be sustained and accordingly the Order of the Commissioner is liable to be set aside and we do so. Since the demand is not sustained on merit itself we have not examined the issue of limitation. Further as regards inadmissibility of credit on input we find that they are not contesting on merit and only on imposition of penalty. We find that they paid the entire amount along with interest before issue of SCN. Therefore there is no substantive ground to impose penalty under section 78 and therefore it is liable to be set aside. Therefore Appeal ST/30046/2021 filed by the appellant is allowed. Further the appeal ST/30344/2020 filed by Revenue will also not sustain and therefore liable to be dismissed. Accordingly the appeal ST/30344/2020 is dismissed. In Appeal ST/31076/2019 the appellants are in appeal against order of Commissioner (Appeals) wherein similar issue has been examined and it has inter alia upheld the decision that they are liable to reverse the credit in terms of provision of Rule 6. However for the reasons cited supra the basic ground for raising the demand itself cannot be sustained and accordingly the order of the Commissioner (Appeals) can also not be sustained and accordingly the order is liable to be set aside. Therefore Appeal ST/31076/2019 filed by the appellant is allowed.

Summary

The primary legal questions considered by the Tribunal revolve around the classification of the appellant's activity involving mutual fund units and the consequent implications on Cenvat credit under the Cenvat Credit Rules, 2004 (CCR) and the Finance Act, 1994. Specifically, the issues are:

1. Whether the appellant's transactions involving purchase and redemption of mutual fund units constitute 'trading of securities' within the meaning of the relevant statutory provisions.

2. If such transactions amount to trading of securities, whether this activity qualifies as an exempted service under the negative list provisions of the Finance Act, 1994, thereby attracting the provisions of Rule 6 of CCR relating to reversal or payment of credit.

3. Whether the appellant is entitled to avail Cenvat credit on input services and inputs used in relation to such transactions, or whether such credit must be reversed or paid as per Rule 6 of CCR.

4. The applicability and correctness of the Adjudicating Authority's reliance on Rule 6(3AA) of CCR, which was introduced with effect from 01.04.2016, for periods prior to its introduction.

5. The validity of penalty imposition under section 78 of the Finance Act for irregular availment of credit.

Issue 1: Nature of Transactions - Trading of Securities or Investment

The statutory framework defines 'goods' under section 65B(25) of the Finance Act to include 'securities', and 'securities' are defined by reference to the Securities Contract (Regulation) Act, 1956, to include units issued under mutual fund schemes. Section 66D(e) exempts 'trading of goods' from service tax, placing such activity in the negative list. Consequently, if the appellant's transactions are 'trading of securities', they would be exempted services for the purpose of service tax.

The appellant contended that their activity was investment in mutual fund units, not trading. They argued that trading requires transfer of property or security from seller to buyer, which does not occur in the mutual fund context where units are allotted rather than transferred. They relied on the Supreme Court's decision in Canbank Financial Services Ltd, which distinguished allotment from transfer and characterized the activity as investment, not trading. Further, they emphasized that no Securities Transaction Tax (STT) was applicable on their transactions, indicating the non-trading nature.

The Tribunal examined definitions from dictionaries and legal lexicons, noting that 'trading' involves buying and selling or exchange of commodities, typically involving transfer of possession and multiple parties. The appellant's transactions were with the mutual fund operator alone, with no transfer of underlying assets or securities. The mutual fund acts as custodian of assets, allotting and redeeming units based on Net Asset Value (NAV), with no say by the appellant in asset management.

The Tribunal also referenced the Supreme Court's ruling in Khoday Distilleries Ltd, which distinguished between allotment (creation) and purchase (transfer) of shares. Applying this reasoning, the allotment and redemption of mutual fund units were not transfers constituting trading. Thus, the Tribunal found the appellant's activity to be investment, not trading.

Issue 2: Whether Activity Constitutes Exempted Service under Negative List

Section 66B levies service tax on all services except those in the negative list under section 66D, which includes trading of goods. Rule 2(e)(2) of CCR defines 'exempted service' as a service on which no service tax is leviable under section 66B.

The Tribunal observed that for an activity to be an exempted service, it must first qualify as a 'service' under section 65B(44), which requires an activity carried out by one person for another for consideration. The appellant's activity did not involve provision of service to the mutual fund; rather, the mutual fund provided a financial product to the appellant.

The Adjudicating Authority had relied on Explanation 3 to Rule 6(1) (effective 01.04.2016), which deems certain non-service activities as exempted services for the purpose of credit reversal, but the Tribunal noted this explanation's retrospective application was limited and could not be invoked for periods before its introduction. Further, the Tribunal found that the appellant's transactions did not constitute a service, and thus could not be considered exempted services under the negative list. The Tribunal also distinguished the Adjudicating Authority's reliance on various judgments holding that credit on input services used partly for non-taxable activities must be reversed, noting that the appellant's activity was not a service at all.

Issue 3: Eligibility to Avail Cenvat Credit and Reversal Under Rule 6 of CCR

Rule 6 of CCR regulates availment and utilization of credit where input or input services are used partly for exempted services. The Department alleged irregular credit on input services and inputs used in relation to the appellant's trading activity (considered exempted service), requiring reversal or payment of an amount equal to 6%/7% of the value of exempted service.

The Tribunal found that since the appellant's activity was not trading and not a service, the provisions of Rule 6 could not be invoked to deny credit or require reversal. The appellant's credit on input services and inputs was therefore not irregular. The Tribunal further noted that the appellant had already reversed credit relating to non-taxable portions of other contracts and paid interest, and penalty was not warranted.

Issue 4: Applicability of Rule 6(3AA) of CCR for Periods Prior to 01.04.2016

The Department challenged the Adjudicating Authority's use of Rule 6(3AA), introduced w.e.f. 01.04.2016, to reduce the demand for periods before its introduction, asserting this was erroneous and illegal.

The Tribunal agreed with the Revenue that the Adjudicating Authority erred in applying Rule 6(3AA) retrospectively. However, since the fundamental charge of trading activity was not sustained, the issue of retrospective application became immaterial to the final outcome. The Tribunal accordingly dismissed the Revenue's appeal on this ground.

Issue 5: Penalty under Section 78 of the Finance Act

The Department sought imposition of penalty for irregular availment of credit. The appellant contended that penalty was not applicable as they had reversed the credit and paid interest before issuance of show cause notice, invoking protection under section 73(3) of the Act.

The Tribunal found that since the demand itself was not sustainable on merits, and the appellant had paid the amounts along with interest prior to initiation of proceedings, the imposition of penalty was not justified. The penalty under section 78 was set aside accordingly.

Significant Holdings and Core Principles

"Admittedly, no actual transfer of underlying assets or securities is being effected from the fund to the appellant or vice versa. In fact, it is more like mutual fund is the custodian of all the underlying assets... and in lieu thereof they have created certain units in their name and are holding the same on their behalf."

"Trading would invariably require transfer of possession as well as presence of at least three persons, which in this case is not getting complied. A trader in goods is expected to buy goods from 'A' and sell to 'B', whereas, in the present case, the transaction is only between the appellant and the mutual fund operator."

"For an activity to be an exempted service, it has to be a service in the first instance as defined under section 65B(44) of the Finance Act, 1994, meaning an activity carried out by a person for another for consideration."

"The appellant cannot be considered as a service provider to the mutual fund, and therefore, it cannot be said that they were engaged in providing any service to any other person for a consideration."

"Since the demand is not sustained on merit itself, the issue of limitation and penalty do not survive."

The Tribunal concluded that the appellant's transactions in mutual fund units constitute investment, not trading of securities. Consequently, such activity is not an exempted service under the negative list, and the appellant is entitled to avail Cenvat credit on input services and inputs used in relation to these transactions without reversal or payment under Rule 6 of CCR. The application of Rule 6(3AA) retrospectively was incorrect but immaterial given the dismissal of the primary charge. Penalty imposition was also unwarranted.