Mutual fund redemption not 'trading of goods'; no CENVAT reversal or extended limitation under Service Tax.

The CESTAT New Delhi in the case ofGodfrey Phillips India Limited v. Commissioner, Central Tax, GST, Delhi East [2025 (12) TMI 557 - CESTAT NEW DELHI] held that subscription and redemption of Mutual Fund units cannot be considered “trading of goods/securities” under Section 66D(e) of the Finance Act, 1994 as it lacks transfer of title, involves unit cancellation/relinquishment rather than sale/purchase to third party, and thus does not qualify as “exempted service” requiring proportionate CENVAT credit reversal under Rule 6(3) of CENVAT Credit Rules, 2004.

​Facts:

Godfrey Phillips India Limited (“the Appellant”) is engaged in manufacture of cigarettes, pan masala and tobacco products at its units, providing taxable services like management consultant, consulting engineer, manpower recruitment/supply, business auxiliary, renting of immovable property, legal consultancy and sponsorship services, registered as Input Service Distributor (ISD), who complied with proportionate reversal of common input service credit under Rule 6(3)(ii) r/w Rule 6(3A) of CENVAT Credit Rules, 2004 and distributed balance credit to manufacturing units under Rule 7, whose surplus profits from sales were invested in Mutual Fund schemes and redeemed as needed for business functioning without separate trading accounts.

​Commissioner, Central Tax, Delhi (“the Respondent”) audited Appellant's records for FY 2013-14 to 2017-18 observing engagement in “trading of securities” without separate accounts, issued SCN dated April 16, 2019 proposing Rs. 4,80,06,500/- demand under Section 73(1)Finance Act, 1994 r/w Rule 6(3)(i)/14 CENVAT Credit Rules invoking extended limitation alleging Mutual Fund redemption as exempt service/”Trading of Goods” under Section 66D(e) negative list requiring credit reversal, and confirmed entire demand with interest/penalty vide Order in Original dated November 26, 2021 holding huge/frequent Mutual Fund investments indicate profit-intent trading, “exempted service” under Rule 2(e) includes non-leviable services, Rule 6(3)(ii)/6(3A) inapplicable due to non-intimation.

The Appellant contended activity of Mutual Fund redemption/subscription is not “trading of goods” under Section 66D(e) as lacks two-party market, title transfer, fixed price unlike stock market sales transferring ownership and is akin to investment management not trading.

​The Respondent contended redemption tantamounts to purchase/sale/trading of securities for profit (huge frequency/amounts), purchase/sale price differential irrelevant as in pre-GST trading was exempt service.

​Aggrieved by confirmation of demand with interest/penalty invoking extended limitation for alleged non-reversal on “exempted” Mutual Fund activity despite ISD compliance and lack of trading intent/suppression, the Appellant approached the Tribunal by way of Appeal under Section 86 of Finance Act, 1994.

​Issue:

Whether subscription/redemption of Mutual Fund units constitutes “trading of goods” under Section 66D(e)Finance Act, 1994 as “exempted service” requiring proportionate CENVAT credit reversal under Rule 6(3)(i)CENVAT Credit Rules, 2004?

​Held:

The CESTAT New Delhi in 2025 (12) TMI 557 - CESTAT NEW DELHIheld as under:

• Observed that, the Appellant being an ISD complied with Rule 6(3)(ii) r/w Rule 6(3A) CENVAT Credit Rules for proportionate reversal of common input services and distributed balance to manufacturing units under Rule 7. The profits from tobacco sales used for business, and the surplus invested/redeemed from Mutual Funds.
• ​Held that the issue is squarely covered by Siegwerk India Pvt. Ltd. vs. Commissioner, Central Goods & Service Tax, Commissionerate, Alwar [2024 (10) TMI 220 - CESTAT NEW DELHI] which held that redemption not to be considered as “trading”, as units are not transferred.
• ​Held that, this activity is not an exempted service under Section 66D(e) and no reversal required under Rule 6. Further noted that invoking extended limitation period to be not applicable and allowed the appeal.

​Our Comments:

The Tribunal followed Siegwerk India Pvt. Ltd. (supra) which held subscription/redemption of liquid Mutual Fund units not “trading of goods” under Section 66D(e) Finance Act as lacks two-party market, title transfer from seller to buyer, fixed price and that units cease to exist (cancelled/relinquished) unlike stock shares transferring ownership. These being the ingredients of trading as set out in Ambuja Cements Ltd. v. CCE Nagpur [2023 (5) TMI 806 (CESTAT Mum).] are absent.

​In the GST regime, under Section 17(3)CGST Act, 2017, mandating proportionate ITC reversal under Rule 42 of the CGST Rules, 2017 on common inputs/services attributable thereto, valued at 1% sale value per CGST Rules and the explanation.

Relevant Provisions:

Rule 6(3)(i), CENVAT Credit Rules, 2004

“6. Obligation of a manufacturer or producer of final products and a provider of output service

(3) (a) A manufacturer who manufactures two classes of goods, namely :-

(i) non-exempted goods removed;

(ii) exempted goods removed; or

(b) a provider of output service who provides two classes of services, namely :-

(i) non-exempted services;

(ii) exempted services, shall follow any one of the following options applicable to him, namely:-

• pay an amount equal to six per cent. of value of the exempted goods and seven per cent. of value of the exempted services subject to a maximum of the sum total of opening balance of the credit of input and input services available at the beginning of the period to which the payment relates and the credit of input and input services taken during that period; or
• pay an amount as determined under sub-rule (3A) :

Provided that if any duty of excise is paid on the exempted goods, the same shall be reduced from the amount payable under clause (i)

Provided further that if any part of the value of a taxable service has been exempted on the condition that no CENVAT credit of inputs and input services, used for providing such taxable service, shall be taken then the amount specified in clause (i) shall be seven per cent. of the value so exempted :

Provided also that in case of transportation of goods or passengers by rail, the amount required to be paid under clause (i) shall be an amount equal to two per cent. of value of the exempted services…..”

Section 17(3) of the CGST Act, 2017

“Apportionment of credit and blocked credits.-

(1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

Explanation.- For the purposes of this sub-section, the expression “value of exempt supply” shall not include the value of activities or transactions specified in Schedule III, 4[except,—

(i) the value of activities or transactions specified in paragraph 5 of the said Schedule; and

(ii) the value of such activities or transactions as may be prescribed in respect of clause (a) of paragraph 8 of the said Schedule”

(Author can be reached at [email protected])