TaxTMI 
TaxTMI 
A Credit Dispute Hidden Inside a Securities Investment
The decision of the CESTAT, New Delhi, in M/s IFCI Limited Versus Commissioner of CGST, Delhi East - 2026 (7) TMI 920 - CESTAT NEW DELHI, raises an important question in the Service Tax and CENVAT credit regime. The issue was not merely whether investment in securities is a service. The deeper question was whether full CENVAT credit can be retained on common input services when those services are used partly for taxable output services and partly for an activity that is not a service at all.
IFCI Limited was engaged in providing taxable banking and financial services. It was registered with the Service Tax Department and availed CENVAT credit on input services. Alongside its taxable activity, it also bought and sold shares and securities using its own funds. The Department alleged that common input services such as housekeeping, professional consultancy, telephone and internet, courier, advertisement, and professional training services were used for both taxable services and securities investment activity.
A show cause notice dated 21.04.2014 was issued for the period April 2008 to March 2011. It proposed recovery of CENVAT credit of Rs.89,84,539/- under Rule 14 of the CENVAT Credit Rules, 2004, read with Section 73 of the Finance Act, 1994. Penalties under Rule 15(3), Section 78, and Sections 77(1) and 77(2) were also proposed. The demand was confirmed, and the Commissioner (Appeals) sustained the order. The matter then reached the Tribunal.
Own-Account Securities Investment Escapes Service Tax, but Not Credit Scrutiny
The appellant's first line of defence was that the purchase and sale of shares and securities from its own funds were solely investment activities. They were not services provided to another person. They were not taxable services. They were not exempt services. They were also not trading services in the sense of rendering a service to a client.
This argument was supported by a series of Tribunal decisions. The appellant relied on M/s. Ponni Sugars Erode Ltd. Versus The Commissioner of GST & Central Excise, Salem - 2024 (5) TMI 3 - CESTAT CHENNAI; M/s. Instakart Services Pvt. Ltd. Versus Commissioner of Central Tax, Bengaluru - 2024 (3) TMI 1350 - CESTAT BANGALORE; M/s. Cognizant Technology Solutions India Private Limited Versus The Commissioner of GST & Central Excise, Chennai - 2024 (9) TMI 922 - CESTAT CHENNAI; M/s. Tata Sons Ltd. Versus Commissioner of Service Tax-I, Mumbai (Vice-Versa) - 2022 (11) TMI 325 - CESTAT MUMBAI; East West Pipelines Pvt. Ltd. Versus Commissioner of CGST & CE, Balapur - 2025 (7) TMI 343 - CESTAT MUMBAI; M/s GMR Hyderabad Air Cargo and Logistics Pvt Ltd Versus Commissioner of Central Tax Rangareddy – GST And Commissioner of Central Tax, Rangareddy – GST Versus M/s GMR Airport Developers Ltd - 2025 (5) TMI 156 - CESTAT HYDERABAD; Flipkart Internet Pvt. Ltd. v. Commissioner of Central Tax, Final Order No.21728/2024 dated 24.10.2024; and Finolex Cables Ltd. Versus Commissioner of Central Excise and Service Tax, Pune-I - 2024 (11) TMI 1459 - CESTAT MUMBAI.
The broad principle emerging from these decisions is that investment of own funds in securities cannot be treated as provision of service. There is no service recipient, and no consideration is received for rendering service to another person. The activity is undertaken on own account. Therefore, it cannot be treated as a taxable service merely because income or profit may arise from such investment.
The Tribunal accepted this broad proposition. It did not treat IFCI's investment of its own funds in securities as a taxable service. Nor did it accept that IFCI was providing a trading service to another person. However, that finding did not conclude the matter in favour of the appellant. It only shifted the focus to the credit question.
The Real Test Is Not the Label, but the Use of Credit
The appellant sought to take the matter further. It argued that because investment activity is not a service, it cannot be treated as an exempted service. Accordingly, according to the appellant, Rule 6 of the CENVAT Credit Rules could not be invoked to demand proportionate reversal. This was the central issue in the case.
The Tribunal approached the matter differently. It recognised that if an activity is not a service at all, it falls outside the Service Tax and CENVAT credit framework. CENVAT credit is intended to remove tax cascading in respect of taxable output services or dutiable manufacture. It is not a general business subsidy. Therefore, if common input services are used partly for taxable services and partly for an activity outside the tax-credit chain, credit cannot be retained for the non-service portion.
This reasoning is important because it avoids an artificial outcome. If the appellant's argument were accepted in full, a person carrying on taxable services and substantial non-service investment activity could retain full credit on common services merely because the investment activity was not an exempted service. That would allow the credit chain to extend beyond the taxable activity for which it was designed.
The Tribunal therefore drew a practical distinction. Investment activity may not be a service. But common services used for that activity cannot automatically generate credit. The credit must be confined to the taxable output side of the business.
Lally Automobiles Supplied the Controlling Credit Principle
The Department relied heavily on M/s Lally Automobiles Pvt Ltd Versus CST, Delhi - 2017 (12) TMI 27 - CESTAT NEW DELHI. The said decision was affirmed by the Delhi High Court in Lally Automobiles Pvt. Ltd. Versus Commissioner (Adjudication), Central Excise - 2018 (7) TMI 1679 - DELHI HIGH COURT and left undisturbed by the Supreme Court in Lally Automobiles Private Limited Versus Commissioner - 2019 (6) TMI 414 - SC Order
The underlying principle in Lally Automobiles was not merely that credit should be reversed where exempted services are provided. The deeper principle was that CENVAT credit is available only within the statutory credit chain. If an activity is neither the manufacture of dutiable goods nor the provision of taxable service, it falls outside the Central Excise Act, the Finance Act, 1994 and the CENVAT Credit Rules, 2004. Input services used for such outside-the-chain activity cannot generate or support CENVAT credit.
The Delhi High Court's affirmation strengthened this approach. It recognised that credit cannot be treated as a general business benefit merely because some expenditure has been incurred for running the establishment. Credit is linked to taxable output. Therefore, where common input services are used partly for taxable services and partly for an activity outside the taxable service/manufacture framework, the assessee cannot retain the entire credit. The credit must be restricted to the portion attributable to taxable output activity.
This principle proved decisive in IFCI's case. The appellant's relied-upon decisions helped establish that own-account investment in securities was not a service. However, they did not address the further and separate question of whether common credit could still be retained for that non-service activity. Lally Automobiles answered that question directly. Since it had been affirmed by the Delhi High Court and left undisturbed by the Supreme Court, it supplied the controlling credit principle for proportionate reversal.
Common Office Services Cannot Be Presumed Exclusively Taxable
The common input services in dispute were ordinary office operations and business support services. They included housekeeping, professional consultancy, telephone and internet services, courier services, advertising, and professional training. These services do not necessarily relate only to taxable output services. They support the business establishment as a whole.
If a business establishment carries on taxable services and also manages investment activity, such common services may support both. The appellant did not maintain separate accounts showing that the input services were used only for taxable output services. In the absence of such separation, the Tribunal held that proportionate reversal was justified.
This part of the ruling is commercially realistic. Taxpayers often treat common administrative services as fully connected with a taxable business merely because the main business is taxable. But where another substantial activity exists, particularly an investment activity generating income or profit, the credit position must be examined with greater care.
Credit Is a Statutory Benefit, Not a General Expense Deduction
The judgment also reminds us of the nature of CENVAT credit. Credit is a statutory benefit, available only within the limits of the statute and rules. It cannot be claimed merely because an expense is incurred for business purposes.
This distinction is sometimes overlooked. For income-tax purposes, a business expenditure may be deductible if incurred for business. But CENVAT credit is different. It depends on whether the input or input services relate to taxable output services or manufacture. The test is not merely for business use. The test is creditable under the CENVAT scheme.
Therefore, even if an input service is used for the overall business, the assessee must still examine whether it supports taxable output activity, exempted activity, or an activity outside the tax framework. The wider the common use, the greater the need for proportionate attribution.
Limitation and Penalty Turned on Credit Conduct
The Tribunal also upheld the extended period of limitation and the penalties. This part of the ruling flowed from the appellant's conduct in availing full credit without maintaining separate accounts and without proportionate reversal.
The appellant was aware that it was engaged in investment activity in securities and that common services were being used in the business. Yet it did not maintain the necessary separation. The Department therefore alleged suppression of material facts and excess availment of credit. The Tribunal found no reason to interfere with the extended period or the penalties.
This part of the decision carries a practical warning. In cases involving mixed activities, the real risk is not limited to the reversal of credit. If proper records are not maintained, the dispute may also invite extended limitation, interest and penalty.
GST Makes the Securities Rule More Explicit
Although IFCI's case arose under the Service Tax and CENVAT regime, its underlying principle remains highly relevant under GST. In fact, GST law is more direct on securities transactions.
Section 2(47) of the CGST Act, 2017 defines 'exempt supply' to mean supply of any goods or services or both that attracts a nil rate of tax or may be wholly exempt from tax, and includes non-taxable supply. Section 17(2) provides that where goods or services are used partly for taxable supplies and partly for exempt supplies, ITC shall be restricted to the portion attributable to taxable supplies.
Section 17(3) then specifically provides, inter alia, that the value of exempt supply shall include transactions in securities. This deeming inclusion is very important. It means that even though securities themselves have special treatment under GST, transactions in securities are relevant for ITC reversal. Rule 42 of the CGST Rules, 2017 provides the mechanism for determining and reversing ITC in respect of inputs and input services used partly for taxable supplies and partly for exempt supplies.
Therefore, in GST, where common inputs or input services are used for taxable supplies as well as for transactions in securities, proportionate reversal of ITC may be required under Section 17 read with Rule 42. The statutory structure under GST therefore reinforces the practical principle seen in IFCI's case.
Financial Businesses Need a Stronger Credit Trail
The ruling is particularly relevant for financial institutions, banks, NBFCs, investment companies, treasury entities, holding companies and businesses with material securities portfolios. Such entities often use the same office, staff, professional support, information systems and administrative services for both taxable supplies and investment operations.
When that happens, the credit trail must be robust. It should not be assumed that all common services belong exclusively to taxable activity. The taxpayer should examine the nature of each service, the functions it supports, the extent of common use and the statutory formula for reversal.
This is not merely a compliance burden. It is a litigation safeguard. If the taxpayer has documented the basis for credit availment and reversal, the dispute becomes easier to defend. If no allocation exists, the Department may argue that full credit was wrongly availed with knowledge of non-service or exempt activity.
The Lasting Message: Credit Must Follow the Taxable Chain
The CESTAT's decision in IFCI does not hold that investment in own securities is a taxable service. On the contrary, it accepts that such investment activity is not a service provided to another person. However, the judgment also makes it clear that this conclusion does not entitle the recipient to full credit on common input services.
The decisive point is the use of credit. If common services support both taxable output services and non-service investment activity, credit must be restricted proportionately. The Department's reliance on Lally Automobiles, affirmed by the Delhi High Court and the Supreme Court, provided the Tribunal with a binding foundation for this conclusion.
The broader message is both simple and durable. Credit is meant to serve taxable output. It cannot be stretched to activities outside the taxable chain. Under Service Tax, this principle operated through the CENVAT framework and the reasoning in Lally Automobiles. Under GST, it is strengthened by Section 2(47), Section 17(2), Section 17(3) and Rule 42.
For taxpayers and professionals, the lesson is practical. Identify common credits. Examine whether securities or other exempt/non-taxable activities are present. Maintain separate records wherever possible. Reverse proportionately where required. A credit claim is strongest when it is supported by evidence.
The credit chain is valuable, but it has a boundary. IFCI reminds us where that boundary lies.
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CA. RAJ JAGGI