Subscription and Redemption of Mutual Fund Units amounts to Sale: AAAR on Zydus Lifesciences Ltd.’s Appeal [Read Order]

The appeal was filed by M/s. Zydus Lifesciences Ltd., a manufacturer and distributor of pharmaceutical products, against the Advance Ruling issued by the Gujarat Authority for Advance Ruling. The appellant utilized surplus funds for investment in mutual fund schemes and subsequently redeemed them to maintain liquidity. The appellant availed Input Tax Credit (ITC) on common inputs and input services used for both taxable supplies and investment activities.

Believing that no reversal of ITC was required for such transactions, the appellant sought a ruling from GAAR. However, GAAR held that the value of mutual fund transactions must be treated as part of exempt supplies under Section 17(3) of the Central Goods and Services Tax Act, 2017, thereby mandating proportionate ITC reversal.

GAAR through application of the “common parlance test”, affirmed that such redemption constitutes a sale transaction ruling that accepting the appellant’s interpretation would nullify the legislative intent behind Section 17(3), which mandates inclusion of transactions in securities for computing exempt supplies.

Aggrieved, the appellant approached the GAAAR under Section 100 of the Central and Gujarat Goods and Services Tax Acts, 2017.

Represented by Jigar Shah, Priyanka Kalwani and Devanshi Sharma, the appellant contended that investment in mutual funds, including subscription and redemption, was carried out in the course of business and did not constitute exempt supplies. It was argued that mutual fund units are neither goods nor services as defined under the Central Goods and Services Tax Act, 2017, and therefore fall outside the scope of Section 17(2).

It was further contended that the redemption of mutual funds is not equivalent to a sale and that no computation mechanism exists to determine the value of redemption for the purpose of reversal of ITC. In the absence of a specific computation mechanism, the provisions for ITC reversal would be inoperative.

Represented by J.A. Pande, the Revenue submitted that the GAAR’s ruling was legally correct and required no interference. It was contended that Section 17(3) of the Central Goods and Services Tax Act, 2017, expressly includes transactions in securities within the computation of exempt supplies, making ITC reversal on related inputs and services mandatory.

The bench comprising of Rajeev Topno, SGST Member and Sunil Kumar Mall, CGST Member, observed that the law explicitly includes transactions in securities, such as mutual fund units, in the valuation of exempt supplies.

The Central Goods and Services Tax Rules, 2017, further prescribe that the value of securities shall be taken as one per cent of their sale value for the purpose of ITC reversal. Hence, the appellant’s argument that no mechanism exists for computation was rejected as untenable.

The bench held that the redemption of mutual fund units amounts to sale in commercial parlance as it signifies selling mutual fund units back to the Asset Management Company according to the definitions provided by HDFC Mutual Fund, Bajaj Finance Limited, and the Association of Mutual Funds in India (AMFI), the Authority stated that redemption.

The Authority in consideration of “common parlance test” further clarified that even if mutual fund investments are considered activities in the course of business, ITC reversal under Section 17(2) read with Section 17(3) remains compulsory.

The GAAAR ruled that the appellant was liable to reverse proportionate ITC on common inputs and input services used in activities relating to the subscription and redemption of mutual fund units, as mandated by the deeming provisions under Section 17(3) of the Central Goods and Services Tax Act, 2017.

Accordingly, the appeal was dismissed and GAAR’s decision was upheld.

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