2024 (10) TMI 220 - AT - Service Tax

Non-reversal of proportionate CENVAT credit availed on common input services - trading of goods - exempt service in terms of section 66D(e) of the Finance Act - Chartered accountant services, telephone services and legal services, used in relation to redemption of mutual funds - Extended period of limitation. HELD THAT - 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 - 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. Thus, the activity undertaken by the appellant would not amount to service under section 65B(44) of the Finance Act. It would, therefore, not be necessary to examine the alternative submissions raised by learned counsel for the appellant that reversal of proportionate credit of common input services utilized for rendition of exempted service along with interest, in terms of rule 6(3)(ii) read with rule 6(3A) of Credit Rules would be sufficient compliance of rule 6 of the Credit Rules. Extended period of limitation - HELD THAT - The impugned order holds that it is because of the audit that the correct facts came to the notice of the department and so the extended period of limitation can be invoked - It is not possible to accept this contention as such a contention was repelled by the Tribunal in M/S GD GOENKA PRIVATE LIMITED VERSUS COMMISSIONER OF CENTRAL GOODS AND SERVICES TAX, DELHI SOUTH 2023 (8) TMI 995 - CESTAT NEW DELHI where it was held that 'in the scheme of the Finance Act, 1994, the officer has been given wide powers to call for information and has been entrusted the responsibility of making the correct assessment as per his best judgment. If the officer fails to scrutinise the returns and make the best judgment assessment and some tax escapes assessment which is discovered after the normal period of limitation is over, the responsibility for such loss of Revenue rests squarely on the shoulders of the officer. It is incorrect to say that had the audit not been conducted, the allegedly ineligible CENVAT credit would not have come to light. It would have come to light if the central excise officer had discharged his responsibility under section 72.' The impugned order, therefore, cannot be sustained - appeal allowed.

Summary

Issues Involved:

1. Whether the activity of redemption of mutual funds qualifies as 'trading of goods' and hence as an exempted service under section 66D(e) of the Finance Act, 1994, warranting reversal of CENVAT credit.
2. Whether the extended period of limitation was correctly invoked by the department.
3. Whether penalties and interest could be imposed on the appellant.

Issue-wise Detailed Analysis:

1. Redemption of Mutual Funds as 'Trading of Goods':

The primary issue was whether the redemption of mutual funds by the appellant constituted 'trading of goods,' which is considered an exempted service under section 66D(e) of the Finance Act, 1994. The department argued that mutual funds are securities and thus qualify as goods, and their redemption should be treated as trading. Consequently, the appellant was required to reverse the proportionate CENVAT credit availed on common input services used in this activity.

The appellant contended that investment in mutual funds does not equate to 'trading of goods' since mutual funds do not involve a transfer of title or ownership. Upon redemption, the mutual fund units cease to exist, distinguishing this activity from traditional trading of securities. The Tribunal, referencing decisions in cases like Ambuja Cements and others, agreed with the appellant's view. It concluded that the activity of subscription and redemption of mutual fund units is akin to investment management, not trading. Therefore, it does not qualify as an exempted service, and proportionate reversal of credit was not required.

2. Extended Period of Limitation:

The department invoked the extended period of limitation under the proviso to section 73(1) of the Finance Act, alleging suppression of facts by the appellant. The appellant argued that it was under a bona fide belief that the activity was not 'trading of goods' and hence not an exempted service. The Tribunal noted that the burden of proving suppression with intent to evade tax was on the department. The Tribunal referred to the Supreme Court's judgment in Pushpam Pharmaceuticals, which requires suppression to be deliberate and with intent to evade duty.

The Tribunal found that the appellant had been filing service tax returns and that the department had conducted audits in the past. The appellant's belief, based on interpretation of legal provisions, was considered bona fide. The Tribunal cited the Supreme Court's decision in Reliance Industries, emphasizing that disputes over legal interpretation do not justify invoking the extended period. Hence, the Tribunal held that the extended period of limitation was not applicable.

3. Imposition of Penalties and Interest:

Given the Tribunal's findings that the activity did not constitute an exempted service and that the extended period of limitation was not applicable, the imposition of penalties and interest was also deemed unjustified. The Tribunal emphasized that the appellant's actions were based on a bona fide belief and that the department had not substantiated any deliberate act of suppression or evasion.

Conclusion:

The Tribunal set aside the impugned order, allowing the appeal. It held that the redemption of mutual funds did not qualify as 'trading of goods' and thus was not an exempted service under section 66D(e) of the Finance Act. Consequently, the appellant was not required to reverse the proportionate CENVAT credit. Additionally, the extended period of limitation was incorrectly invoked, and penalties and interest could not be imposed.