TaxTMI 
TaxTMI 
2026 (1) TMI 1505
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.... which they duly discharge the service tax liability. The appellants also avail CENVAT Credit of service tax paid on the input services used in, or in relation to provision of the said output services. Many a time, the appellants used to carry idle surplus funds in their books of accounts, which are invested into various financial instruments, including investment in mutual funds, with the objective of earning returns and dividends. Whenever the appellants require such idle funds for further investment in their business operations, they use to redeem such mutual funds. The redemption of such mutual funds may result in either profit or loss, depending on the difference between the price paid at the entry level of investment and the price received upon their exit from the particular mutual fund scrips. The amount invested in mutual funds is shown under the investment column in the Balance Sheet, and the profit/loss incurred on redemption of such mutual funds is reflected as income from investment activity in the books of accounts. 1.2 During the course of scrutiny of the books of accounts under EA-2000, the audit wing of the department had observed that apart from provisioning of ....
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....ees had deliberately suppressed the vital fact of availment of inadmissible CENVAT Credit, with the intent to evade payment of amount under Rule 6 of the Rules of 2004 and therefore, the proviso to Section 73 (1) of the Act of 1994 read with Rule 14 ibid is liable to be invoked. 1.4 Both the above referred SCNs dated 06.12.2016 and 23.04.2018 were adjudicated by the learned Commissioner of CGST & Central Excise, Mumbai Central vide the Order-in-Original No. 61 & 62/ COMMR/RS/CGST & CEX/MC/2020-21 dated 17.03.2021 (for short, referred to as 'the impugned order'), in confirming the proposals made thereunder. 1.5 Feeling aggrieved with the impugned order dated 17.03.2021, the appellants have preferred these appeals before the Tribunal. 2.1 Learned Consultant appearing for the appellants submitted that investment in mutual fund scheme cannot be treated as trading in securities inasmuch as, in case of redemption of mutual fund units, the activity amounts to relinquishment of the units along with the extinguishment of rights associated with the units and thus, the said relinquishment cannot be treated as trading of units in the mutual fund scheme. He further submitted that the a....
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..... On the other hand, learned AR appearing for the Revenue has reiterated the findings recorded in the impugned order and pleaded that confirmation of the adjudged demands on the appellants is in conformity with the statutory provisions. 4. Heard both sides and examined the case records. 5. The provisions contained in the Act of 1994 and the Rules of 2004, relevant for consideration of the present dispute, are quoted below: Section 65B(44) of the Act of 1994 "service" means any activity carried out by a person for another for consideration, and includes a declared service, ....... CENVAT Credit Rules, 2004 Rule 2 (e) "exempted services" means a- (1) taxable service which is exempt from the whole of the service tax leviable thereon; or (2) service, on which no service tax is leviable under section 66B of the Finance Act; or (3) taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken..... Obligation of a manufacturer or producer of final products and a provider of output service Rul....
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....le 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. 8. On careful reading of the allegations levelled against the appellants in the SCNs as well as in the impugned order, regarding provision of both the category of services i.e., taxable and exempted, we find that the authorities below have not properly understood the true ambit and purport of the 'Mutual Fund Scheme' and confused the said phrase, to equate it with the phrase of 'trading of shares/stocks', made through the stock exchanges. Therefore, a brief summary on the concept of Mutual Fund is required for proper understanding, which are outlined herein below: 8.1 A mutual fund is an investment vehicle, structured as a trust and regulated under the SEBI (Mutual Funds) Regulations, 1996. When an in....
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....driven pricing One price per day Continuous price changes No buyer-seller matching Buyer-seller matching Units created/extinguished Shares exchanged Investment activity Trading activity 9. We find that the Co-ordinate Bench of this Tribunal, in the case of M/s GMR Hyderabad Air Cargo and Logistics Pvt. Ltd. Vs. Commissioner of Central Tax Rangareddy - GST and others, vide Final Order No. A/30142-30144/2025 dated 29.04.2025 (in Service Tax Appeal Nos. 30176 of 2019, 30344 of 2020 and 30046 of 2021), has dealt with an identical issue, involved in the present case. In the said order, it was held that investment in mutual funds should not be considered as an exempted service and therefore, the embargo created in Rule 6 of the Rules of 2004 should not be applicable. The relevant paragraphs, recorded in the said order dated 29.04.2025 are extracted herein below: "16. Therefore, we now proceed to examine whether the nature of activity being undertaken can be considered as trading or otherwise. Admittedly, the appellants are investing certain money in the mutual fund of a particular type (liquid debt fund) where they are allotted certain units by Birla S....
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....ment for short term profit and is not exactly trading. There is also force in the argument that trading would invariably require transfer of possession as well as presence of at least three persons, which in this case is not getting complied. A trader in goods is expected to buy goods from 'A' and sell to 'B', whereas, in the present case, the transaction is only between the appellant and the mutual fund operator i.e., BSMF. Therefore, from that angle also, it may not be considered as an activity akin to trading. In Khoday Distilleries Ltd Vs CIT [2008 (307) ITR 312 (SC)], the Hon'ble Supreme Court, inter alia, explained the term 'allotment of share' and held that there is difference between issue of share to a subscriber and a purchase of share from an existing shareholder. The first case is that of creation, whereas, second case is that of transfer. Thus, allotment of share was held as not involving transfer. In this case, though a right is created for units, the units are not being transferred to the appellant." 10. On reading of the definition of 'exempted service' provided in Rule 2(e) of the Rules of 2004, extracted in paragraph 5 above, it transpires that none of the ingr....
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....nd 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. Further, it would also be erroneous to say that the appellants had indulged in the activities of 'trading', inasmuch as the basic conditions of such terminology i.e., involvement of two persons, availability of a market for the purpose of trade in mutual fund, a determinative price for the transaction and transfer of title/ownership from one party to the other, are absent in the case in hand. Therefore, in our considered view, the appellants should not be termed as a trader in mutual funds, in order to fall within the ambit of Rule 6 of the Rules of 2004. We find that in an identical situation, concerning the issue of deployment of funds by way of subscription to mutual fund units, whether to be considered as a trading activity or otherwise, this Bench of the Tribunal, in the case of Finolex Cables Ltd. (supra) has answered the question negatively. T....
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....ra), 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. Our findings are confined only to the issue of applicability of the newly inserted Explanation 3, which made effective from 01.04.2016, whether to be given effect prospectively or it would have the retrospective effect. Vide Notification No. 13/2016-C.E.(N.T.) dated 01.03.2016, the Central Government had made the CENVAT Credit (Third Amendment) Rules, 2016, to amend the CENVAT Credit Rules, 2004. In the preamble to the said notification, it was specifically being mentioned that "save as otherwise provided, they shall come into force on the 1st day of April, 2016". Since no retrospective effect was provided in the said notification, it cannot be said that the contents in the amending rules would be applicable retrospectively, with regard to consideration of the issue of....
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....mediary between the 'investor' and the 'mutual funds'. Any service required for performing such activity of investment could be used only by such fund manager, who does all activities, and the role of the appellants as 'investor', is confined only to the requirement of transferring the available idle fund in favour of those fund managers. On reading of the reply dated 15.03.2021 to the SCN issued by the department (available at page 77-95 in the appeal memorandum), 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. The relevant paragraphs in the said reply dated 15.03.2021 addressed to the adjudicating authority in response to the SCN dated 23.04.2018, are extracted herein below: "Rule 6 is not applicable as no input services are used for t....