Deeming Fictions and ITC Reversal: Gujarat AAAR on Mutual Fund Transactions as Exempt Supplies

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....urities" are expressly included in the "value of exempt supply" by a specific deeming provision. On appeal, the Appellate Authority for Advance Ruling (AAAR), Gujarat, examined the appellant's challenge to that conclusion, particularly the nature of redemption of mutual fund units and the scope of section 17(3). This decision is significant in the broader GST framework for three reasons: (i) it clarifies the treatment of investments in securities (especially mutual funds) for ITC apportionment; (ii) it underscores the effect of statutory deeming fictions in overriding otherwise logical or equitable arguments; and (iii) it demonstrates how statutory rules, especially valuation rules, must be interpreted to preserve the efficacy of the parent statute. Key Legal Issues 1. Characterisation of Mutual Fund Transactions for GST Purposes The first core issue is whether subscription and redemption of mutual fund units-being transactions in "securities" that are explicitly excluded from the definitions of "goods" and "services"-fall within the concept of "exempt supply" or "non-taxable supply," and thereby trigger ITC reversal u/s 17(2). 2. Scope and Effect of Section 17(3) and the ....

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....s, sale of land and ... sale of building." This is a clear deeming provision: even though transactions in securities are not supplies of goods or services, the statute fictionally includes them in the computation base of "exempt supply" purely for ITC apportionment purposes. The AAAR treated this deeming inclusion as conclusive. The contention that "securities" are outside the scope of exempt supply in definitional terms does not survive in the face of an explicit legislative directive that, for section 17(2), "value of exempt supply... shall include ... transactions in securities." Once that deeming fiction operates, transactions in securities-though not supplies in the usual sense-must be treated as part of exempt supply value for ITC allocation and reversal. In effect, the legal issue shifts from classification to the effect of a specific statutory fiction, which the authority rightly held to be determinative. 2. Machinery Provision and the Explanation to Chapter V of the CGST Rules The appellant further contended that there is no workable machinery for computing the value of redemption of mutual funds to be included in the exempt supply base. Drawing on jurisprudence such as....

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.... the fund to buy back the units. * In common and commercial understanding, redemption involves cessation of ownership by the unit holder in exchange for monetary consideration: functionally indistinguishable from a sale of the units to the AMC. The AAAR endorsed the use of the common parlance test, with reference to judicial authority (e.g., Robo Silicon Pvt Ltd.  [2021 (11) TMI 3 - KARNATAKA HIGH COURT]) which emphasises that for tax interpretation, the popular meaning as understood by those dealing in the goods or services is crucial, especially in the absence of a statutory definition. Further, by invoking Oswal Agro Mills Ltd. [1993 (4) TMI 73 - SUPREME COURT] and related principles, the AAAR emphasised that in taxation, there is no scope for reading into or subtracting from clear statutory language. Where the act uses the phrase "transactions in securities," and the rules refer to the "sale value of such security," those terms must be interpreted harmoniously so that the legislative command-to include such transactions in exempt supply value-is not frustrated. Accordingly, the authority concluded that redemption is, in effect, a sale of units to the AMC and, ther....

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....fund units are "securities" and, although not goods or services, "transactions in securities" are statutorily deemed to form part of the "value of exempt supply" for the purposes of section 17(2) by virtue of section 17(3) of the CGST Act. * Consequently, where common inputs and input services are used both for taxable supplies and for activities in securities such as subscription and redemption of mutual funds, proportionate ITC reversal u/s 17(2) read with rule 42 is mandatory. * Redemption of mutual fund units, in common and commercial parlance, is effectively a sale of those units back to the AMC, and thus has a "sale value" for purposes of the valuation rule that treats the value of a security as 1% of its sale value. * The Explanation to Chapter V of the CGST Rules provides a valid machinery provision for determining the value of securities; interpreting "sale value" to exclude redemption would render section 17(3) otiose and is therefore impermissible. Obiter Considerations Two elements of the reasoning are closer to obiter dicta: * The observation that the appellant did not satisfactorily establish that investment in mutual funds is in the course or furtherance of....