2025 (5) TMI 487 - AT - Service Tax

Exemption from service tax - investment in mutual funds - Trading of Goods - section 66D(e) of Finance Act - reversal of proportionate CENVAT credit attributable to input services used commonly for taxable services and the exempted service of trading of goods - HELD THAT - The subscription and redemption of liquid mutual fund units cannot be termed as trading of goods and therefore do not fall under the exempted services under Section 66D(e) of the Finance Act. The activity to classify as exempted service under Rule 2(e) of the Cenvat Credit Rules 2004 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. The activity of investment in mutual funds does not involve the presence of a service rendered by a service provider towards a recipient of service for some consideration. The activity undertaken would not amount to service in terms of Section 65B(44) of the Act. Conclusion - Mere investment transactions involving transfer of securities do not qualify as service and hence cannot be treated as exempted services such as trading of goods. Appeal allowed.

Summary

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

1. Whether the activity of investment in mutual funds by the appellant constitutes "trading of goods" under section 66D(e) of the Finance Act, 1994, thereby qualifying as an exempted service under Rule 2(e) of the CENVAT Credit Rules, 2004.

2. Whether the appellant is liable to reverse proportionate CENVAT credit attributable to input services used commonly for taxable services and the exempted service of trading of goods, in the absence of separate accounts maintained as mandated under Rule 6(2) of the CENVAT Credit Rules.

3. Whether the subscription and redemption of mutual fund units amount to a "service" as defined under section 65B(44) of the Finance Act, 1994, which is a prerequisite for classification as an exempted service under Rule 2(e) of the CENVAT Credit Rules.

4. The applicability of the provisions of Rule 6(3) of the CENVAT Credit Rules, 2004 read with section 73(1) and section 78 of the Finance Act, 1994 for recovery of CENVAT credit along with interest and penalty.

Issue-wise Detailed Analysis

Issue 1 and 3: Whether investment in mutual funds constitutes "trading of goods" and whether it qualifies as a "service" under the Finance Act

Relevant Legal Framework and Precedents: Section 66D(e) of the Finance Act, 1994 defines "exempted services" and includes "trading of goods." Rule 2(e) of the CENVAT Credit Rules, 2004, defines exempted services in line with the Act. Section 65B(44) of the Finance Act defines "service" as any activity carried out by a person for another for consideration, including declared services but excluding transfer of title in goods or immovable property by sale or gift.

Several precedents of the Tribunal were relied upon by the appellant, notably the decision in Siegwerk India Pvt Ltd Vs. Commissioner of CGST (Final Order No. 58747/2024), which held that subscription and redemption of mutual fund units do not constitute trading of goods. The Tribunal observed that such activity is not a sale or purchase of securities but an investment activity.

Court's Interpretation and Reasoning: The Tribunal reiterated that for an activity to be classified as an exempted service under Rule 2(e), it must first qualify as a "service" under section 65B(44). The investment in mutual funds does not involve a service provider rendering a service to a recipient for consideration. Instead, it is a transaction involving transfer of ownership rights in securities, which is excluded from the definition of service.

The Tribunal observed that the department failed to demonstrate that the appellant's investment in mutual funds involved a service rendered by a service provider to a recipient. Therefore, the activity cannot be considered a "service" and consequently cannot be treated as "trading of goods" under exempted services.

Key Evidence and Findings: The appellant's business practice involved investing surplus funds in mutual funds by subscribing to units and redeeming them as needed. The department issued a show cause notice alleging this constituted trading of goods, which was disputed by the appellant and supported by multiple Tribunal decisions.

Application of Law to Facts: Applying the legal definition of "service" and the established precedents, the Tribunal found that the appellant's activity of mutual fund investment does not fall within the ambit of trading of goods or exempted services.

Treatment of Competing Arguments: The department's contention that mutual fund investments are akin to trading of goods was rejected based on the statutory definition and judicial precedents. The appellant's reliance on the series of favorable Tribunal decisions was accepted, and the department's arguments were found unsubstantiated.

Conclusion: The Tribunal concluded that investment in mutual funds by the appellant is not trading of goods and does not constitute an exempted service under section 66D(e) or Rule 2(e). It also does not qualify as a "service" under section 65B(44) of the Finance Act.

Issue 2 and 4: Liability to reverse proportionate CENVAT credit and applicability of recovery provisions

Relevant Legal Framework and Precedents: Rule 6(2) and 6(3) of the CENVAT Credit Rules, 2004 require reversal of proportionate credit attributable to input services used partly for exempted services unless separate accounts are maintained. Section 73(1) and section 78 of the Finance Act, 1994 provide for recovery of credit along with interest and imposition of penalty for erroneous availing of credit.

Court's Interpretation and Reasoning: Since the Tribunal held that the mutual fund investment activity is not an exempted service, the premise for reversal of proportionate credit under Rule 6(3) does not arise. Consequently, the demand for recovery of CENVAT credit, interest, and penalty based on treating mutual fund investment as exempted service is unsustainable.

Key Evidence and Findings: The appellant did not maintain separate accounts for the input services used in relation to taxable and exempted services, which would have triggered reversal under Rule 6(3) if the activity was exempted. However, since the activity is not exempted, this requirement does not apply.

Application of Law to Facts: The Tribunal applied the settled principle that reversal of credit is mandated only when input services are used partly for exempted services. Since no exempted service exists here, the appellant is not liable to reverse credit or pay recovery with interest and penalty.

Treatment of Competing Arguments: The department's reliance on non-maintenance of separate accounts and consequent reversal was rejected as the foundational classification of the activity as exempted service was negated.

Conclusion: The demand for recovery of CENVAT credit, interest, and penalty under Rule 6(3) and sections 73(1) and 78 of the Finance Act is set aside as the activity does not constitute exempted service.

Significant Holdings

"The activity of subscription and redemption of the units of mutual funds cannot be said to be an activity of sale and purchase of the securities. It would, therefore, not be an activity relating to trading and securities. The activity undertaken by the appellant would therefore not be an exempted service in terms of section 66D(e) of the Finance Act and proportionate reversal of credit was not required to be made."

"Even otherwise, the activity of investment in mutual fund cannot be termed as 'service' under the Finance Act. For an activity to fall under the ambit of 'exempted service' under rule 2(e) of the Credit Rules, the activity has to first qualify as a 'service'. Section 65B(44) of the Finance Act stipulates that 'service' means any 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 or gift. Thus, there has to be a service provider who provides a service to the recipient in lieu of consideration. The department has failed to substantiate that investment in mutual fund by the appellant involves a 'service' rendered by a service provider to a service recipient."

The Tribunal established the core principle that the classification of an activity as an exempted service under the CENVAT Credit Rules requires the activity to qualify as a "service" under the Finance Act. Mere investment transactions involving transfer of securities do not qualify as service and hence cannot be treated as exempted services such as trading of goods.

Accordingly, the Tribunal set aside the impugned order confirming the demand of recovery of CENVAT credit, interest, and penalty, and allowed the appeal on merits without addressing other contentions.