In a recent ruling, the Mumbai bench of the Customs Excise and Service Tax Appellate Tribunal ( CESTAT ) ruled that the investment of surplus cash in mutual funds is not considered a trading activity and is therefore exempted from service tax demands, noting that mutual fund investments do not constitute trading since there is no right to transfer units beyond redemption, and the appellant merely made investments without providing any services.
The appellant, Jsw Dharamtar Port Pvt Ltd, engaged in operating a port at Dhramtar, Maharashtra, provided services such as berth hiring and cargo handling. In addition to this, the appellant invested surplus cash in mutual funds. The Revenue viewed these investments as trading of securities, categorizing them as exempt services under Rule 2(e) of the Cenvat Credit Rules, 2004. Based on this, the Revenue sought payment under Rule 6(3A) of the CCR, calculating the amount by applying a ratio of the exempted service value to total services, which was then used to compute the Cenvat credit availed during the disputed period. Consequently, a show cause notice was issued on December 11, 2019, covering the period from 2014-15 to July 2016, invoking the extended period of limitation. The matter was adjudicated, and the demand was confirmed, prompting the appellant to appeal before the tribunal.
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The key issue was whether the confirmed demand, alleging that the appellant used common input services for both taxable and exempt services ( income from mutual funds/securities ), is valid. The appellant clarified that the surplus was invested in mutual funds, and no trading activity was conducted. The financial statements for the disputed period show these investments under “purchase of money market mutual funds” and profits as “proceeds from sale of money market mutual funds,” recorded under “cash flow from investing activities.” The appellant has never categorized these activities as trading.
The appellant, primarily engaged in Information Technology Software Services and Business Support Services, emphasized that they do not engage in the purchase and sale of mutual funds or securities, nor are they licensed by the Stock Exchange or SEBI to do so. The department, however, interpreted the income from these investments as consideration for trading in securities, although it is merely capital gains from income investments. The department appears to have misinterpreted the terminology, as “securities” are specifically addressed in the Finance Act, 1994, without any reference to the appellant providing taxable services related to trading securities.
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The department did not claim that the appellant provided taxable services such as share transfer agent services. Under Section 105(zzzzg), taxable service relates to services provided by a recognized stock exchange in connection with buying, selling, or dealing in securities. In this case, the appellant only invested income in mutual funds and sold some investments, acting similarly to any individual investor. The appellant is not involved in the business of trading shares or securities under Section 105(zzzzg) of the Finance Act, 1994. Only licensed entities can conduct trading activities, and the department has wrongly conflated the appellant’s investments with trading activities.
Upon reviewing the submissions and evidence, the bench found that the appellant had invested in mutual funds and recorded profits under “other income” for the years 2014-15, 2015-16, and 2016-17. The department mistakenly treated these investments as trading activities and issued a notice under the assumption that the appellant provided exempted services and failed to maintain separate records for common input services. The department also demanded a 6%/7% payment on exempted services, including trading in mutual funds, which is not justified since the appellant cannot transfer mutual fund units to third parties without SEBI licensing. The tribunal concluded that mutual fund investments do not constitute trading, as there is no right to transfer units beyond redemption, and the appellant only made investments rather than provided any services.
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Further ruled that the department wrongfully invoked Rule 6(3) in demanding the reversal of credit on exempted services. A significant portion of the demand was time-barred, as the appellant had already disclosed all relevant records during audits and had not suppressed any material facts. As the case relied on balance sheets, tax returns, and other records, the extended limitation period was deemed unjustifiable. The tribunal set aside the impugned order, allowing the appellant’s appeal.
The tribunal referred to a similar case involving Cognizant Technology Solutions India Pvt. Ltd., where investments in mutual funds were not considered trading activities. As a result, the tribunal, led by Ashok Jindal, Judicial Member, found no merit in the impugned order and allowed the appeal with consequential relief.
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