Sangeetha Prathap

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that redemption of mutual fund units does not constitute “trading of goods” and therefore cannot be treated as an exempt service requiring reversal of CENVAT credit under Rule 6 of the CENVAT Credit Rules, 2004. The ruling came from a Bench comprising Justice Dilip Gupta (President) and P.V. Subba Rao (Technical Member) while allowing the appeal filed by Godfrey Phillips India Limited against a service tax demand raised by the Department

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The appellant, registered as an Input Service Distributor, had invested surplus profits from its tobacco and FMCG operations into mutual fund schemes. During an audit for the financial years 2013–14 to 2017–18, the Department took the view that redemption of mutual fund units amounted to “trading of securities” and consequently an “exempt service” under Section 66D(e), alleging failure to maintain separate accounts for common input services. A show cause notice was issued demanding ₹4,80,06,500 as reversal under Rule 6(3)(i) along with interest and penalties by invoking the extended period of limitation under Section 73(1). The Commissioner later confirmed the entire demand, holding that redemption of mutual funds amounted to purchase and sale of securities, thereby mandating reversal of proportionate credit

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In challenge to this view, the appellant submitted that investment in mutual funds could not be equated with trading, and relied on the Tribunal’s earlier decision in Siegwerk India Pvt. Ltd.. Accepting this position, the CESTAT observed that “trading” requires transfer of title in property from one person to another at a known price in advance. The Bench emphasized that when mutual fund units are redeemed, the units cease to exist rather than transfer to a third party, a key distinction that removes mutual fund redemption from the scope of trading. The Tribunal reiterated that the activity is akin to management of investments and cannot be considered an exempt service under Section 66D(e)

Since redemption of mutual funds is not an exempt service, the Tribunal concluded that Rule 6(3) reversal of CENVAT credit had no application. It also followed the Siegwerk ruling to hold that the Department was not justified in invoking the extended period of limitation under the proviso to Section 73(1), noting that the facts did not demonstrate any suppression or intent to evade on the part of the assessee

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Allowing the appeal, the CESTAT held that the Commissioner “committed an error in confirming the demand with interest and penalty,” and set aside the order in its entirety. The Tribunal concluded that mutual fund redemption is an investment activity and not trading of goods, and therefore the demand of reversal under Rule 6(3), along with interest, penalty and invocation of the extended limitation period, could not be sustained.

Appearance

Counsel For  Petitioner: S.C. Vaidyanathan and Shri Shivam Batra, Advocates

Counsel For Respondent: Aejaz Ahmad, Authorized Representative 

Cause Title: Godfrey Phillips India Limited versus Commissioner, Central Tax

Case No: Service Tax Appeal No. 51478 Of 2022

Coram: Justice Dilip Gupta (President), P.V. Subba Rao (Technical Member)