2024 (9) TMI 922 - AT - Service Tax

CENVAT Credit - trading of securities - investing in mutual funds and securities - appellant has availed common input services for taxable and exempted services (amount received from mutual funds / securities) - period from 2010-11 to 2014-15 - HELD THAT - As per Section 2 (h) (i) and 2 (h) (id) of the Securities Contract (Regulation) Act, 1956 (42 of 1956), the activity of purchase and sale i.e., trading of units of Mutual Fund Schemes and Equity Share indulged by a taxpayer, is nothing but trading of securities . As goods include securities and trading of goods is an exempted service, the activity of purchase and sale of units of Mutual Fund Schemes and Equity Shares indulged by the appellant, is an exempted service. It can be seen that the appellant is investing their surplus / income in mutual funds. The entire demand is raised on the basis of financial statements of the appellant for the disputed period. A sample of the financial statement for the year 2010-11 has been extracted above. In such financial statement the amount invested in mutual funds is shown under the heading purchase of money market mutual funds . The profit received from sale of mutual funds is shown as proceeds from sale of money market mutual funds . These fall under the main heading cash flow from investing activities . The appellant has no where accounted the income from purchase and sale of securities under the head of trading . In the present case, the appellant has invested their income in shares / mutual funds and also sold certain investments. They have acted like any individual who would invest funds in shares / securities. The appellant is not engaged in the business of trading of shares / securities as provided under Section 105 (zzzzg) of the Act ibid. It requires to be stressed that the activity of engaging in sale and purchase of securities for another is a taxable service under Finance Act, 1994. Only a licensed person or agent can engage in doing such activity of sale and purchase of shares. The department seems to have confused purchase and sale of shares as an investment with the trading of goods as a business - the trading of goods is part of the business of the manufacturer. The appellant is not engaged in the business of trading of shares. In fact it is stated that they have only one portfolio which is investment portfolio. All this goes to establish that appellant is not engaged in trading of goods / securities. The Tribunal M/S. INSTAKART SERVICES PVT. LTD. VERSUS COMMISSIONER OF CENTRAL TAX, BENGALURU 2024 (3) TMI 1350 - CESTAT BANGALORE after detailed discussion has held that the investment income cannot be held to be trading of goods so as to demand 6% value under Rule 6 (3) (iii) of CCR 2004. The demand cannot sustain - the impugned order is set aside - appeal allowed.

Summary

Issues Involved:
1. Whether the appellant's activity of investing in mutual funds and securities constitutes trading of securities.
2. Whether the appellant is liable to reverse Cenvat credit on input services used for both taxable and exempted services.

Issue-wise Detailed Analysis:

1. Whether the appellant's activity of investing in mutual funds and securities constitutes trading of securities:

The appellant is engaged in providing Information Technology Software Services and Business Support Services and avails Cenvat credit of service tax paid on various input services. The Department contended that the appellant engaged in trading of securities, based on their financial statements showing investments in equity shares and mutual funds, and the proceeds from these investments were reflected under 'other income'. According to Rule 2 (e) of the Central Credit Rules, 2004, 'exempted services' include 'trading'.

The appellant argued that they are not engaged in trading securities but merely investing surplus income in securities for appreciation and acquisition of value. They do not have separate portfolios for investment and trading, and securities are held as capital assets, not as stock in trade. The Department's interpretation was based on a misconception of facts and law, confusing investment with trading activities.

The Tribunal referenced previous decisions, such as M/s. Instakart Services Pvt. Ltd. and M/s. Ponni Sugars Erode Ltd., which clarified that investment in mutual funds and securities does not constitute trading. The Tribunal concluded that the appellant's activity of investing surplus income does not amount to trading of securities, and thus, the income from these investments is not consideration for any service but rather capital gains.

2. Whether the appellant is liable to reverse Cenvat credit on input services used for both taxable and exempted services:

Rule 6 of the Cenvat Credit Rules, 2004, stipulates that Cenvat credit is not allowed on input services used for providing exempted services. The Department alleged that the appellant availed Cenvat credit on common input services for both taxable services (ITSS) and exempted services (trading of securities) without maintaining separate accounts or paying the stipulated amount under Rule 6 (3) (i) and 6 (3A).

The appellant maintained that they are not engaged in providing exempted services, as their activities do not constitute trading of securities. The Tribunal agreed, noting that the appellant's investments are for appreciation and not for trading purposes. The Tribunal emphasized that the income from investments is not consideration for any service, thus not falling under the purview of exempted services.

The Tribunal cited previous rulings, reinforcing that investment activities do not equate to trading of goods or securities and do not necessitate reversal of Cenvat credit. The Tribunal concluded that the demand for reversal of Cenvat credit was unsustainable.

Conclusion:

The Tribunal set aside the impugned order, holding that the appellant's investment activities do not constitute trading of securities, and therefore, the appellant is not liable to reverse Cenvat credit on input services. The appeal was allowed with consequential relief.