2026 (1) TMI 1505 - AT - Service Tax

Investment in mutual funds: scope of exempted service expanded by Explanation 3, applied prospectively and credit reversal requires proof of inputs used

Amendment inserting Explanation 3 expanded the scope of 'exempted service' under the CENVAT Credit Rules to include activities not previously regarded as ... Investment in mutual funds not trading - Exempted services under CENVAT Credit Rules - Applicability of Rule 6 CENVAT Credit Rules, 2004 - Explanation 3 prospective effect of amendment - Inputs or input services used for exempted activity - Definition of 'service' under Section 65B(44) of the Finance Act, 1994 - HELD THAT:- It is an admitted fact on record that the output services provided by the appellants, for which they got themselves registered with the service tax department, are exigible for payment of service tax and are not exempted services, in terms of Rule 2(e) of the Rules of 2004. The appellants had also discharged their service tax liability on provision of the taxable output service, by utilizing the CENVAT credit available in their books of accounts. However, in the impugned proceedings, the service tax department had concluded that investment of idle funds in the mutual fund scheme, should tantamount to provision of the exempted service and therefore, the case of the appellants squarely falls under the purview of Rule 6 of the Rules of 2004 and that since they did not follow the procedures laid down thereunder, were required to pay an amount, equal to 6% of the value of such exempted services. The definition of ‘service’ (supra) as per Section 65B (44) of the Act of 1994, makes the statutory provision abundantly clear that an activity must be carried out by a person for another, that too for consideration, before it is regarded as a service, leviable to payment of service tax. In this case, for investment of money in the mutual fund, the appellants had not provided any service to the Asset Management Companies (fund managers) and no consideration either in monetary terms or otherwise were received by them. Rather, on minute analysis of the transactions made by the appellants, it would safely be concluded that the fund managers should ideally be construed as the service providers, instead of the appellants, since by managing the funds, the former had provided the service to the latter. Hence, the modus operandi adopted by the appellants in deployment of surplus idle money in the mutual fund scheme should not be construed as a provision of service. Since, as per the Explanation 3, the scope of exempted service was extended beyond the statutorily defined phrase of ‘service’, the confusion arose in the mind of the adjudicating authority that investment in mutual funds should be considered as a trading activity and thus, the embargo created in Rule 6 of the Rules of 2004 should be applied. We are not concerned with the issue, whether or not to consider such investment as an exempted service. By amending the CENVAT Rules in inserting Explanation 3, the scope of exempted service was extended beyond the defined term of ‘service’, meaning thereby that any activity, even though not being considered as a service previously, was brought under the scope of ‘exempted service’, for the purpose of restricting availment of CENVAT credit. In other words, dealing in securities under the unamended Rule 2(e) read with sub-rule(1) of Rule 6 ibid, was not considered as an exempted service, and as such, the service provider was entitled to avail the full CENVAT credit for utilization towards provision of the taxable output service(s). Since the said notification dated 01.03.2016 is not a beneficial piece of legislation, its application, in our considered opinion, should be effective prospectively i.e., from 01.04.2016. Therefore, in our considered view, the adjudged demands confirmed on the appellants for the period from 01.07.2012 to 31.03.2016 in the impugned order, do not survive and thus, is liable to be set aside. With regard to the period April, 2016 to March, 2017, though the newly inserted explanation 3 support the case of the Revenue that the activity undertaken of investment in mutual funds may be considered as an exempted service defined in clause (e) of Rule 2 of the Rules of 2004, but the fact has to be established that for provision of such exempted service, inputs or input services were in fact, used by the service provider. On reading of the reply dated 15.03.2021 to the SCN issued by the department, we find that the appellants had clearly stated that they had neither incurred any expenses for undertaking the investment activity in mutual funds, nor used any input services for such investment in mutual funds. Furthermore, the allegation made in the SCN that they have availed business support and repairs & maintenance services for investment activity, has no basis, since these were only used for their regular business operations and not for the activity of investment in mutual funds. Appellants have substantiated their claim that they did not avail any CENVAT credit for investing idle money in the mutual funds scheme, and that the above averments made in their reply to the SCN were not at all considered by the adjudicating authority, and moreover no documentary evidences were relied upon by Revenue in support of their claim of availment of CENVAT credit on the disputed services, we are of the considered view, that the case of the appellants would not fall under the purview of the Explanation 3 appended to sub-rule (1) of Rule 6 of the Rules of 2004, for payment of amount contemplated under sub-rule (3) of Rule 6 ibid. Therefore, the impugned order confirming the adjudged demands for the period after 01.04.2016 cannot be sustained. We do not find any merits in the impugned order, insofar as it has confirmed the adjudged demands for the periods 2012-13 to 2014-15 and 2015-16 to 2016-17 mentioned in the SCNs dated 06.12.2016 and 23.04.2018, respectively. Therefore, the impugned order in entirety is set aside and the appeals are allowed in favour of the appellants. Issues: (i) Whether investment in mutual funds by the assessee amounts to trading/exempted service attracting reversal under Rule 6 of the CENVAT Credit Rules, 2004; and (ii) whether Explanation 3 inserted to Rule 6 by Notification No.13/2016-C.E.(N.T.) is to be given retrospective or prospective effect.Analysis: The Tribunal examined the nature of mutual fund transactions and distinguished them from stock exchange trading, noting NAV-based pricing, creation/extinguishment of units by the mutual fund, absence of buyer-seller matching, and lack of transfer of underlying securities or market-driven price discovery. It held that the activity of investing idle funds in mutual funds does not satisfy the conditions of trading or provision of a 'service' by the investor under Section 65B(44), and therefore does not fall within the pre-amendment scope of exempted services under Rule 2(e). The Tribunal further analysed Notification No.13/2016-C.E.(N.T.) which inserted Explanation 3 to Rule 6, observing the notification contained no retrospective clause and introduced a new restriction; hence it is not a declaratory or curative amendment and should operate prospectively from 01.04.2016. For the post-amendment period, the Tribunal noted Revenue failed to prove that inputs or input services were used for the alleged exempted activity; the assessee consistently stated no input services were used for investment activity and no documentary evidence was produced by Revenue to the contrary.Conclusion: The investment in mutual funds by the assessee is not trading or an exempted service for the periods prior to 01.04.2016 and demands for those periods are unsustainable. The Explanation 3 inserted by Notification No.13/2016-C.E.(N.T.) is to be applied prospectively from 01.04.2016. For the period from 01.04.2016 onwards, Revenue failed to establish use of inputs or input services for the alleged exempted activity; consequently the impugned demands for that period are also unsustainable. The impugned order is set aside and the appeals are allowed in favour of the assessee.