2023 (5) TMI 806 - AT - Service Tax

Disallowance of CENVAT Credit - activity of purchase and sale of units of Mutual Fund Schemes - trading (exempt) services or not - manufacturer of Cement and Clinker falling under chapters 25232930 and 25231000 respectively - Rule 6(3A) of the Rules, 2004 - HELD THAT - Following are the ingredients of trading (as found from definition of trading) i. There should be two parties and a market to purchase and sell the good involved; ii. There should be transfer of right/title involved from the seller to the buyer, while selling the same; iii. There should be a fixed price known in advance while selling or buying the said good etc. On undertaking the test of the activities undertaken by the appellant, against the above criteria the activity of subscription and redemption of the units of the mutual fund is not an activity of sale and purchase of the securities. When the units of mutual fund are redeemed, the units cease to exist i.e., gets cancelled or relinquished, It does not get transferred to the third party. Thus investment activities undertaken by the appellants is totally different from 'trading in securities'. The issue has been considered by the tribunal in ACE CREATIVE LEARNING PVT. LTD. VERSUS COMMISSIONER OF CENTRAL TAX, BENGALURU SOUTH GST COMMISSIONERATE 2021 (4) TMI 687 - CESTAT BANGALORE where it was held that There is a restriction on the right to transfer unit and the appellant cannot transfer units to any other person. Further I find that the appellant cannot be termed as service provider because he only makes an investment in the mutual fund and earn profit from it which is shown in the Books of Accounts under the head other income . Hence the question of invoking Rule 6 does not arise, and I am of the view that Department has wrongly invoked the provisions of Rule 6(3) demanding the reversal of credit on the exempted services. Thus, the activity of redemption and subscription of mutual fund is akin to management of investments and not trading in services, it cannot be held as exempted service, for seeking the reversal as per provisions of Rule 6 of CENVAT Credit Rules, 2004. In the impugned order, reliance has been placed on the decision in the case of ROCA BATHROOM PRODUCTS PVT. LTD. VERSUS C.C.C., JAIPUR 2016 (12) TMI 223 - CESTAT NEW DELHI . The said decision is distinguishable as it is in respect of the trading of goods and not in the case where the Education Guide itself clarifies that buying and selling of the unit of mutual funds is not service itself. There are no merits in the demand made by the impugned order. As the order fails on the merit of demand, the same will fail on the demand of interest and penalty imposed - appeal allowed.

Summary

Issues Involved:
1. Whether the exempted service viz. 'Trading of Security' qualifies as an input service under Rule 2(1) of the Cenvat Credit Rules, 2004.
2. Whether the appellant is liable for payment of interest and penalties.

Analysis:

Issue 1: Qualification of 'Trading of Security' as Input Service

The appellant engaged in the manufacture of excisable goods, availed Cenvat credit for various input services which were distributed to their manufacturing units. During an audit, it was observed that the appellant was involved in 'Trading of Securities', an exempted service as per Section 66D of the Finance Act, 1994. The appellant did not maintain separate accounts for input services used for both taxable and exempt services, nor did they reverse the credit attributable to exempt services as required under Rule 6(3)(ii) of the Cenvat Credit Rules, 2004.

The Commissioner (Appeals) upheld the original order, disallowing the Cenvat credit, stating that 'Trading of Securities' did not qualify as an input service under Rule 2(1) of the Cenvat Credit Rules, 2004. The definition of 'input service' requires a direct nexus or integral connection with the manufacture of final products, which 'Trading of Securities' did not have. The tribunal cited the case of ROCA BATHROOM PRODUCTS PVT. LTD. Vs. COMMISSIONER OF C. EX., JAIPUR-I, where it was held that credit available only if inputs/input service used directly or indirectly in relation to manufacture and clearance of final product.

The tribunal further clarified that 'securities' are included under 'goods' as per Section 65B (25) of the Finance Act, 2012, and buying or selling of mutual funds or debentures is not considered a service but a transaction in securities. This was supported by the decisions in Orion Appliances Ltd and Gulf Oil Corpn. Ltd., where it was held that trading activity cannot be considered a service, and hence not an exempted service.

The tribunal also analyzed the dictionary meanings of terms like 'sale', 'purchase', 'trading', 'redemption', and 'subscription', concluding that the activities of subscription and redemption of mutual fund units do not constitute trading in securities. The tribunal referred to several decisions (ACE Creative Learning Pvt. Ltd., Tata Sons Ltd., Space Matrix Design Consultants Pvt. Ltd., Shriram Life Insurance Company Ltd.) where it was consistently held that investment activities in mutual funds are not trading activities and do not qualify as exempted services for the purpose of Rule 6 of the Cenvat Credit Rules, 2004.

Issue 2: Liability for Interest and Penalties

Given that the demand for Cenvat credit reversal was not sustained on merits, the tribunal found no basis for the imposition of interest and penalties. The tribunal concluded that the activity of managing investments in mutual funds is not an exempted service and does not warrant reversal of Cenvat credit under Rule 6 of the Cenvat Credit Rules, 2004.

Conclusion:

The tribunal allowed the appeal, setting aside the demand for Cenvat credit reversal, interest, and penalties, concluding that the activities of subscription and redemption of mutual fund units by the appellant do not qualify as 'Trading of Securities' and hence are not exempted services under the Cenvat Credit Rules, 2004.

(Order pronounced in the open court)