GMR Hyderabad Air Cargo and Logistics Pvt Ltd Vs Commissioner of Central Tax Rangareddy (CESTAT Hyderabad)
CESTAT Hyderabad held that 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. Accordingly, it cannot be classified as exempted service and hence the very charge for applying Rule 6 of Cenvat Credit Rules could not be sustained.
Facts- The Department, in the course of audit, noticed that the appellant had availed irregular Cenvat Credit on exempted services and on certain inputs. Essentially, it was alleged that the appellants were engaged in purchase and sale of mutual fund units from Birla Sunlife Mutual Fund (BSMF) and that the said activity was treated by the department as trading of goods, inasmuch as mutual funds were covered within the definition of ‘securities’ and which in turn is included in the definition of ‘goods’. Therefore, the said transactions of sale and purchase of mutual fund units were considered as ‘trading of goods’, which was considered as exempted service. As a consequence, the appellants were required to comply with the provisions of Rule 6 of CCR. Thus, the department for the period October, 2013 to 2017-18 proposed to recover an amount of Rs.2,86,21,921/- in terms of Rule 6(3)(i) of CCR read with explanation under Rule 6(3D) of CCR, which was @ 6%/7% of the value of exempted service.
The Adjudicating Authority upheld the demand to the extent to Rs. 91,75,473/- only. However, being aggrieved, the present appeal is filed.
Conclusion- The Coordinate Bench at Delhi in the case of M/s Seigwerk India Pvt Ltd Vs CCGST [2025-VIL-433-CESTAT-Del-ST], 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.
Held that 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).
Held 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.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
M/s GMR Airport Developers Ltd (hereinafter referred to as the appellant) are in appeal against the OIO dt.30.04.2020 vide Appeal No.ST/30046/2021, whereby, out of total demand of Rs.2,87,41,260/-, an amount of Rs.92,94,812/- was confirmed 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 (hereinafter referred to as the Act).
2. The brief facts of the case are that the Department, in the course of audit, noticed that the appellant had availed irregular Cenvat Credit on exempted services and on certain inputs. Essentially, it was alleged that the appellants were engaged in purchase and sale of mutual fund units from Birla Sunlife Mutual Fund (BSMF) and that the said activity was treated by the department as trading of goods, inasmuch as mutual funds were covered within the definition of ‘securities’ and which in turn is included in the definition of ‘goods’. Therefore, the said transactions of sale and purchase of mutual fund units were considered as ‘trading of goods’, which was considered as exempted service. As a consequence, the appellants were required to comply with the provisions of Rule 6 of CCR. The department noticed following categories of input services in respect of which Cenvat credit had been availed by the appellant as relatable to trading of securities.
a) Office rent and electricity services
b) Internal audit services
c) Statutory tax audit services
d) Travel agency services
e) Director sitting fees
f) Travel agent’s services
3. Thereafter, as the appellants were found to be providing both exempted service as well as dutiable service, the department for the period October, 2013 to 2017-18 proposed to recover an amount of Rs.2,86,21,921/- in terms of Rule 6(3)(i) of CCR read with explanation under Rule 6(3D) of CCR, which was @ 6%/7% of the value of exempted service. There was another demand on account of irregular ailment of Cen vat credit on inputs in relation to supply and installation of e-boarding facility where it was alleged that they had availed Cen vat credit on inputs which were clearly relatable to non-taxable material portion of the contract involving reversal of credit of Rs.1,19,339/- along with interest. The appellants had already reversed the said amount along with interest. However, they had not paid penalty due thereon claiming that penalty was not invokable in terms of section 73(3) of the Act.
4. On adjudication, the Adjudicating Authority, vide order dt.30.04.2020, after going through the statutory provisions under the Act as well as CCR, inter alia, held that there is clearly ‘trading’ in goods in this case when they transacted units by way of their redemption and therefore, in view of the factual position that the assessee had utilized common input services for providing such exempted service, provisions of Rule 6(1) of CCR would be invokable to deny the credit of tax taken on such input service. The Adjudicating Authority, however, examined whether payment of 6%/7% of value of exempted service is required to be made, as proposed in SCN, as per Rule 6(3)(ii) or a proportionate reversal can be permitted, as sought by the appellant. Therefore, after holding that the appellants are free to follow any option, he computed the amount required to be reversed in terms of Rule 6(3)(ii) as Rs.91,75,473/-. Thus, out of total amount of demand i.e., Rs. 2,86,21,921/-, he has upheld the demand to the extent of Rs.91,75,473/- only.
5. At this juncture, it is also to be noted that Department has also come in Appeal vide Appeal No.ST/30344/2020 against reducing the amount to be paid/credit to be reversed i.e., Rs.1,94,46,448/- and also against non-imposition of mandatory penalty of Rs.1,94,46,448/- thereon. Essentially, the grounds taken by the Revenue are that the Adjudicating Authority has failed to take into account the relevant facts and erred in predetermining liability of the appellant at a much reduced extent by adopting Rule 6(3AA), which came into effect only from 01.04.2016. Department felt that the reliance placed by the Adjudicating Authority on Rule 6(3AA) of CCR is wrong as the said provision was introduced w.e.f. 01.04.2016. Therefore, for the period prior to this insertion i.e., October, 2013 to March, 2016 involving demand of Rs.1,48,57,279/-, the Adjudicating Authority grossly erred in dropping the same by adopting a subsequently introduced provision. Further, even for the period subsequent i.e., April, 2016 to June, 2017, reliance on Rule 6(3AA) is also erroneous as certain procedural requirements stipulated in relation to Rule 6(3A) as well as Rule 6(3A)(ii) were required to be met. Therefore, the Adjudicating Authority has wrongly extended the benefit by suo moto invoking sub-rule 6(3AA).
6. Appellants are also in appeal (ST/30176/2019) on similar issue for the period from 2013-14 to 2015-16, against OIA dt.29.10.2018, whereby total demand of Rs.64,85,502/- was confirmed invoking extended period along with interest and penalties.
7. Learned Advocate for the appellant has mainly contested that the allegation that they were engaged in trading of securities is not correct and is not based on correct appreciation of facts and law in this regard. They were merely investing in short term debt and money market instruments by way of buying units of mutual fund viz., Birla Sunlife Cash Plus-Growth Regular Plan and that there was no Securities Transaction Tax (STT) applicable on such buying and selling of debt funds and therefore, the mutual fund of the nature which has been allotted to them by Birla Sunlife, cannot be treated as security. He has further submitted that the term ‘trading’ and ‘investment’ are not defined either in the Central Excise Act or in the Finance Act and merely investing in mutual fund for generating higher return is not a trading activity. Moreover, for trading, transfer of property/security from seller to buyer is a must, while investment in mutual fund is made only by way of allotment of units and no actual transfer of units are made to the investor. He has further submitted that without prejudice to their claim that the said activity is not trading activity, even if the appellants are liable to reverse the proportionate credit, it has to be in accordance with the provision of Rule 6(3)(ii) where they are required to reverse only proportionate credit utilized towards trading activities.
8. Learned AR, on the other hand, reiterates the findings of the Adjudicating Authority, insofar as it relates to holding the said activity as trading in security, as also for considering the same as exempted service. However, in appeal filed by the Revenue i.e., ST/30344/2020, he has submitted that department is correct in saying that recalculation of the amount to be reversed by adopting a non-existing provision for the period prior to the introduction of Rule 6(3AA) of the CCR by the Adjudicating Authority was not correct and in essence, the entire amount, as proposed in the SCN for the reversal should have been confirmed.
9. Heard both sides and perused the records. Since all these appeals are having common issue, we propose to take them up together.
10. The core issue involved in these appeals is whether the appellants were engaged in trading of securities or otherwise and if they were engaged in trading of securities, whether by virtue of its being in the negative list during the material time, the activity of investing in mutual fund would tantamount to exempted service, which in turn would require certain payment of amount or reversal of credit in accordance with provisions of Rule 6 of CCR or otherwise. Before we embark on the issue whether the activity being undertaken by the appellant is a trading activity or otherwise, it would be appropriate to understand the statutory provisions. As per section 65B(25) of the Act, ‘goods’ means every kind of movable property other than actionable claim and money, and includes, inter alia, securities. As per section 65B(43) of the Act, ‘securities’ has the meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956 and as per the said section, ‘securities’ include, inter alia, units or any other such instrument issued to the investors under any mutual fund scheme. Therefore, as per these statutory provisions, unit under any mutual fund scheme has to be considered as securities.
11. Further, in terms of section 66D, certain services on which no service tax is leviable includes trading of goods vide section 66D(e) of the Act. Further, as per section 66B of the Act, which is the charging section, w.e.f. 01.07.2012, service tax is levied on all services other than those services specified in the negative list under section 66D. Therefore, trading of goods, which is specified under negative list, would clearly be outside the purview of section 66B.
12. Further, w.e.f. 01.07.2012 in terms of Rule 2(e)(2) of CCR, ‘exempted service’ means a service on which no service tax is leviable under section 66B of the Act. In other words, exempted service means a service on which no service tax is leviable under section 66B of the Act. Insofar as the ailment and utilization of credit is concerned in a situation where both dutiable and exempted services are being provided, these are governed by Rule 6, where in the event of use of input or input service, in or in relation to manufacture of exempted goods or for provision of exempted service, the Cenvat credit shall not be allowed. However, there are certain provisions to regulate the situation by reversing the credit or paying an amount equal to 6%/7% (as the case may be) in accordance with provisions under Rule 6, while for the period prior to 01.04.2016, the options were in terms of Rule 6(3)(i), (ii) & (iii), after 01.04.2016, it is in terms of Rule 6(3)(i) & (ii) read with Rule 6(3A) of CCR.
13. In the present appeals, the Adjudicating Authority has considered that buying and selling or for that matter, allotment of mutual fund units by Birla Sun life and its redemption by the appellant is nothing but trading in securities and therefore, in view of various provisions, the said activity would constitute exempted service for the purpose of Rule 6 of CCR. Thereafter, considering that Rules permit for payment of an amount in terms of Rule 3 and the option cannot be imposed by Department, predetermined the amount which was required to be paid.
14. The appellants are mainly contesting that the activity undertaken by them in relation to units of mutual fund was nothing but investment and it did not constitute trading in securities. They have relied on the judgment of Hon’ble Supreme Court in the case of Canbank Financial Services Ltd Vs Custodian & Ors [2004 (8) SCC 355]. They have also relied on the definition of ‘trading’ and ‘investment’ in Oxford dictionary, where ‘investment’ has been defined as ‘the action or process of investing money for profit’ and ‘trading’ has been defined as ‘the activity of buying and selling goods and services’. A great deal of arguments has gone into distinguishing ‘investment’ and ‘trading’. It is also noted that the Adjudicating Authority has taken into account the explanation (3) under Rule 6(1), as inserted w.e.f. 01.04.2016, which states as under:-
“Explanation 3 – For the purposes of this rule, exempted services as defined in clause (e) of rule 2 shall include an activity, which is not a service as defined in section 65B(44) of the Finance Act, 1994 provided that such activity has used inputs or input services.”
15. Essentially, he felt that even when the output activity is not covered by the definition of service, payment of amount calculated in the provided manner or reversal of credit relatable to such activity is required to be made, since such activity is deemed to be an exempted service. Further, the Adjudicating Authority has also taken into consideration that assuming that the notice, per se, was not engaged in trading, the fact remains that they were transacting in securities and on such activity, no service tax was being discharged by them. Therefore, relying on the judgment of the Tribunal in the case of Orion Appliances Ltd Vs CST, Ahmedabad [2010 (19) STR 205 (Tri-Ahmd)], as also in the case of Mercedes Benz Pvt Ltd Vs GCE, Pune-I [2014 (36) STR 704 (Tri-Mumbai)], where it was found that trading was not a service, still it was held that the portion of tax paid on input services which was not attributable to output service could not be availed as credit. He has also distinguished the judgment relied upon by the appellant in the case of Canbank Financial Services Ltd Vs Custodian & Ors (supra) stating that in that case, the Canbank Mutual Fund has only created ownership in the shares, which was vested in respondents 2. To that extent, there was no transfer of ownership at the stage of allotment. However, once the ownership is vested in the allotted, any further transaction therein has to be considered as transaction involving transfer of ownership. He observed that in the instant case, ownership created by allotment had been taken possession of by the assessee as evidenced by the payments made to the person who created such ownership and thereafter, redeemed such ownership and the rights associated with the units on receipt of consideration. Thus, the said judgment of Hon’ble Supreme Court would not apply. He ultimately held that the intention of Rule 6(1) of CCR is to ensure that credit of service tax paid on input services should not be allowed to a provider of output services who utilized such services either exclusively or commonly for providing taxable services and non-taxable service activity.
16. Therefore, we now proceed to examine whether the nature of activity being undertaken can be considered as trading or otherwise. Admittedly, the appellants are investing certain money in the mutual fund of a particular type (liquid debt fund) where they are allotted certain units by Birla Sunlife and thereafter, as and when they wish to redeem the same, the amount is flowing back from the mutual fund to the appellant. Admittedly, trading and investment is not defined either in the Central Excise Act or the Finance Act, 1994. As per Webster dictionary ‘trading’ has been defined as an act of buying, selling or exchanging commodities at either wholesale or retail within a country or between countries. As per P. Ramanathan Aiyar’s Advance Law Lexicon 5thedition, trade means a craft or business which a person has learnt and which he carries as a means of livelihood. It is an admitted fact that in this case, there is sale and purchase of mutual fund units. While, sale and purchase have not been defined under the Act, however, the same have been defined under section 2(h) of the Central Excise Act, wherein it has been defined as “sale” and “purchase”, with their grammatical variations and cognate expressions, mean any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration. Therefore, in the context of Central Excise Act, sale and purchase would entail transfer of possession of goods and therefore, even in the case of securities being considered as goods, there has to be transfer of securities. In the given factual matrix, it is apparent that 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 in which they have invested the money received from the appellant and in lieu thereof they have created certain units in their name and are holding the same on their behalf. Thus, as and when they want to invest, more units will be created in their name and similarly, as and when they want to redeem, those units will be liquidated or extinguished in their favor and the said unit may get further allotted in the name of other person who is interested in buying more units. It is also obvious that appellants have no say in the investment made by Mutual Fund in various assets, bonds, shares, etc., and they are only entitled to redeem the allotted units on the NAV, determined by the Mutual Fund operator i.e., BSMF.
17. Therefore, there is force in the submission that this is more in the nature of investment for short term profit and is not exactly trading. There is also force in the argument that 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 i.e., BSMF. Therefore, from that angle also, it may not be considered as an activity akin to trading. In Khoday Distilleries Ltd Vs CIT [2008 (307) ITR 312 (SC)], the Hon’ble Supreme Court, inter alia, explained the term ‘allotment of share’ and held that there is difference between issue of share to a subscriber and a purchase of share from an existing shareholder. The first case is that of creation, whereas, second case is that of transfer. Thus, allotment of share was held as not involving transfer. In this case, though a right is created for units, the units are not being transferred to the appellant.
18. Learned AR has relied on the fact that in view of the provision under Rule 6(1) of CCR, by virtue of explanation (3), it is obvious that whatever activity is not leviable to service tax under section 66B will be treated as exempted service for the purpose of CCR. Per contra, we find force in the argument of the appellant that it has to be a service in the first instance before it can be covered in the ambit of negative list and the reliance placed by the Adjudicating Authority on the explanation to conclude that the activity is covered under exempted service, irrespective of there being service or otherwise, does not appear correct, more so, when the explanation relied upon has come into effect only from 01.04.2016.
19. Revenue has relied on the judgment of Hon’ble High Court of Delhi in the case of Lally Automobiles Pvt Ltd Vs CCE [2018 (17) GSTL 422 (Del)], wherein, the Hon’ble High Court examined the issue of whether the Cenvat credit is eligible for input services used for trading as trading is an exempted service, keeping in view the explanation added to Rule 2(e) vide Notification No. 03/2011-CE(NT), which made it amply clear that exempted service includes trading. The Hon’ble High Court observed that with the introduction of explanation to Rule 2(e) of CCR, 2004, w.e.f. 01/04/2011, which will be prospective in applicability, exempted services included trading and consequential amendment was also made in Rule 6 by inserting explanation (1) to define the value of ‘trading’ for the purpose of formula given in sub-rule (3A) of Rule 6. Finally, on the issue whether the assessee could claim the credit on input, which were neither service nor manufacture, in view of Rule 6(2), inter alia, held that whenever someone undertakes activities that cannot be called either as service or manufacture, then that activity goes out of the purview of both Central Excise Act as well as the Finance Act. In such cases, an assessee would be ineligible for claiming input service tax credit on an output which is neither a service nor excisable goods. This order was affirmed by Hon’ble Supreme Court.
20. While the Adjudicating Authority himself had some doubt whether this activity would be appropriately classifiable as service or otherwise, he relied on many case laws to establish that the tax paid on input services, which are not attributable to output service, cannot be availed by a provider of output service. In the SCN, the ground taken for invoking Rule 6 is that transacting in mutual fund is transacting in security and that transaction is nothing but trading and since trading is not leviable to service tax in terms of section 66B, therefore, it would be an exempted service. However, for coming to the conclusion that even if it is not trading or even if it is not a service, they were still not liable to take credit and if taken, they were required to reverse the same in accordance with the provisions of Rule 6 of CCR are clearly the charges, which were not leveled in the SCN and hence he cannot adjudicate upon the same and therefore, reliance on various case laws including the order of the Hon’ble High Court of Delhi as affirmed by Hon’ble Supreme Court in Lally Automobiles Pvt Ltd (supra) is misplaced. Moreover, the said judgment was in the context of Rules and statutory provisions prevailing prior to 01.04.2011, when there was no provision to treat trading as either service or manufacture, whereas, in the present appeal, Department has invoked legal provisions post 01.04.2012 and therefore, facts are also distinguished.
21. There is also force in the argument of learned Advocate that the definition of ‘service’ makes it abundantly clear that an activity has to be carried out by a person for another for consideration before it is being considered as service. In this case, no activity has been done by appellant to Mutual Fund for a consideration and at best, it would be vice versa, making Mutual Fund as service provider. It is an admitted fact that their activity is not covered within the definition of declared service. We find that section 66B excludes all services except those falling under section 66D. The term ‘service’ in section 66B has to be construed in terms of section 65B(44). Thus, in given factual matrix, appellant cannot be considered as a person who is providing a service to mutual fund for a consideration. Even if we go by Rule 2(e)(2) of CCR, it covers only such services which are not leviable to service tax in terms of section 65B(44). Thus, any activity qua the appellant, which cannot satisfy their activity being service, cannot be treated as exempted service for the purpose of Rule 6. Further, even though in terms of explanation 3, if an activity is not a ‘service’ in terms of section 65B(44), it would still be deemed to be ‘exempted service’ for the purpose of Rule 6. However, this amendment has been made only w.e.f. 01.04.2016. Thus, even if an activity is not a service, it would be deemed to be covered under the expression ‘exempted service’ for period after 01.04.2016 and not before that. Moreover, the word exempted service is quantified by the term provision of exempted services. For reasons discussed supra, how the appellant could be considered as provider of service or exempted service in a given factual matrix.
22. Further, we note that the Coordinate Bench at Delhi in the case of M/s Seigwerk India Pvt Ltd Vs CCGST [2025-VIL-433-CESTAT-Del-ST], 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). This judgment has also relied on various other judgments of the coordinate bench, which are as follows:-
a) M/s Ambuja Cements Ltd Vs CCCE & GST, Nagpur [2023 (5) TMI 806 CESTAT – Mumbai]
b) Ace Creative Learning Pvt Ltd Vs CCT, Bengaluru [2021 (4) TMI 687 CESTAT- Bangalore]
c) M/s Tata Sons Ltd Vs CST-I, Mumbai (vice versa) [2022 (11) TMI 325 CESTAT – Mumbai]
d) Space Matrix Design Consultants Pvt Ltd Vs CCT, Bangalore [2019 (4) TMI 1599 CESTAT – Bangalore]
23. Therefore, respectfully following the ratio in the judgments of the coordinate bench as also discussions supra, 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.
24. Further, in view of the above findings, 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.
25. 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.
26. Therefore, Appeal ST/31076/2019, filed by the appellant is allowed.
