Space Matrix Design Consultants Pvt. Ltd. Vs Commissioner of Central Tax (CESTAT Bangalore)
Summary: The present appeal was directed against the impugned order dated 01.11.2018 passed by the Commissioner (Appeals), who had upheld the Order-in-Original and rejected the appellant’s appeal.
The appellant was registered under Service Tax for Provider/Recipient of work contract, Design Services, Business Support Services etc., and was availing credit of service tax paid on input services under the Cenvat Credit Rules, 2004. During internal audit of its records for the period 01/2013 to 03/2017, the Department observed that the appellant was also engaged in purchase and redemption of various Mutual Fund Units.
The Department proceeded on the basis that trading in units of mutual funds was to be considered “trading in goods” falling under the negative list under Section 66D(e) of the Finance Act, 1994. Since such activity was not liable to service tax under Section 66B of the Finance Act, 1994, it was treated as an “exempted service” under Rule 2(e) of the Cenvat Credit Rules, 2004.
On that basis, the Department alleged that the appellant had availed and utilised credit of service tax paid on input services used for both taxable and exempted services, without maintaining separate accounts under Rule 6(2), or making the payment contemplated under Rule 6(3)(i) or Rule 6(3)(ii) of the Cenvat Credit Rules, 2004.
A show-cause notice dated 23.11.2017 demanded service tax of Rs. 5,43,200/- on an amount of Rs. 77,60,000/- under Section 73(1) of the Finance Act by classifying the activity of trading in mutual funds as exempted service, along with interest and penalties. The original authority confirmed the demand by order dated 12.04.2018, holding the activity of trading in mutual fund as exempted services and imposing interest and penalty. The Commissioner (Appeals) subsequently rejected the appellant’s appeal.
Before the Tribunal, the appellant contended that the authorities had proceeded on the wrong premise that it was engaged in purchasing and sale of Mutual Funds. According to the appellant, “Trading” in Section 66D was to be understood as regular buying and selling of stocks and shares. The appellant further submitted that trading of goods contemplated buying and selling goods held in stock in the regular course of business, on which VAT was applicable.
The appellant also submitted that the Mutual Funds had been purchased as investments and sold as such, with the income being offered to tax as Capital Gains on investments rather than Business Income. It was argued that none of the appellant’s input or input services could be attributed to any activity of “trading in securities”. The appellant was not in the business of trading in securities and had merely invested in Mutual Funds as part of its liquidity management activity. Audited financial statements were furnished in support.
The Tribunal found that the appellant was not in the business of buying and selling Mutual Fund securities. It held that the appellant had made investments in Mutual Funds in financial years 2016-17 to utilise surplus funds accruing from time to time, with an intention to manage the company’s liquidity and mitigate its operational and financial risk. The investments were redeemed only when funds were necessary and the amounts were utilised for the operational needs of the company.
The Tribunal further found that the appellant was not engaged in the business of trading in securities (Mutual Funds), but that the investment in Mutual Fund was an investment activity. The gain from the return of Mutual Fund was taxed as capital gain and not as business income.
The Commissioner (Appeals) had proceeded on the basis that the appellant had availed and utilised credit on common input services such as Works Contract Services, Interior Decorator and Design Services and Architect Services, which were used for both taxable services and exempted services, including trading in Mutual Fund securities. On that premise, the Commissioner (Appeals) had upheld the demand of 6% of the value of exempted services.
The Tribunal held that this finding was not tenable in law. For investment in Mutual Fund securities, the appellant had not utilised the common input services identified by the Commissioner (Appeals), namely Works Contract Services, Interior Decorator and Design Services and Architect Services. The Tribunal therefore held that the very basis of the finding was unsustainable because the Department had failed to prove that those input services were also used in or in relation to the provision of exempted services, namely trading in securities.
In the absence of such co-relation, the Tribunal held that Rule 6(3) was not applicable. It consequently concluded that the impugned order was not sustainable in law and set it aside, allowing the appeal with consequential relief, if any.
FULL TEXT OF THE JUDGMENT/ORDER OF CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
The present appeal is directed against the impugned order dated 01.11.2018 passed by the Commissioner (Appeals) whereby the Commissioner (Appeals) has upheld the Order-in-Original and rejected the appeal of the appellant. Briefly the facts of the present case are that the appellants are registered and holding S.T. Registration Certificate No. AAHCS2907GST001 for Provider/Recipient of work contract, Design Services, Business Support Services etc., and are availing the credit of the tax paid on ‘input services’ under the provisions of Cenvat Credit Rules, 2004.
The internal audit party, during the course of audit on their records for the period 01/2013 to 03/2017 had observed that they were also engaged in purchase and redemption of various Mutual Fund Units. The department’s contention is that, trading in units of mutual funds is to be considered as ‘trading in goods’ and falls under the negative list as per the definition given in Section 66D (e) of the Finance Act, 1994 and hence such activities is not liable to be taxed as per 66B of the Finance Act, 1994 and are “exempted services” as per Rule 2(e) of the Cenvat Credit Rules.
On these allegation that the appellants have availed and utilized the credit of service tax paid on input services which were used both for provision of taxable as well as exempted services and they have neither followed the provisions of Rule 6(2) of Cenvat Credit Rules, 2004 while maintaining separate accounts nor paid any amount in terms of Rule 6(3) (i) or Rule 6(3)(ii) of the said Rule. On these allegation a show-cause notice dated 23.11.2017 was issued to the appellant demanding recovery of service tax amount of Rs. 5,43,200/- (Rupees Five Lakhs Forty Three Thousand and Two Hundred only) on the amount of Rs. 77,60,000/- (Rupees Seventy Seven Lakhs and Sixty Thousand only) under the provisions of Section 73(1) of the Finance Act by classifying the activity of trading in mutual funds as exempted service along with interest and also proposed penalties.
After due process original authority vide its order dated 12.04.2018 confirmed the demand and recovery of service tax amount of Rs. 5,43,200/- (Rupees Five Lakhs Forty Three Thousand and Two Hundred only) under Section 73(1) by holding that the activity of trading in mutual fund as exempted services along with interest and penalty under various Sections of the Finance Act, 1994. Aggrieved by the said order appellant filed appeal before the Commissioner who rejected the said appeal. Hence the present appeal.
2. Heard both the parties and perused the records.
3. Learned consultant appearing for the appellant submitted that the impugned order is not sustainable in law as the same has been passed without properly appreciating the facts and the provisions of law. He further submitted that both the authorities have proceeded on wrong premises that the appellant is engaged in the activity of purchasing and sale of Mutual Funds. He further submitted that the trading as used in Section 66D is to be understood as regular buying and selling of stocks and shares. He also submitted that the intent of the word “Trading” and phrase “Trading of Goods” used in Section 66D is to indicate buying and selling of goods which is held in stock as regular course of business on which VAT is applicable. If Mutual Funds are goods as per the Department, then VAT should have been leviable on trading of Mutual Funds as well. He further submitted that the Mutual Funds have been purchased as investments and sold as such and income offered to tax as Capital Gains on investments and not as Business Income which would have been the case if the “Trading” revenue were to be regular and continuous part of normal course of business. He further submitted that none of the input or input services of the appellants can be attributed to the activity of “trading in securities” and therefore reversal of cenvat credit on these services is not warranted. It is his further submission that the appellant is not in the business of “trading in securities” and has only invested in Mutual Fund as a part of its liquidity management activity. He has also furnished the audited financial statement to prove this submission.
4. On the other hand the learned AR defended the impugned order.
5. After considering the submissions of both the parties and perusal of the material on record, I find that the appellants are not in the business of buying and selling of Mutual Fund securities rather the appellant has made investment in Mutual Funds in financial years 2016-17 in order to utilize the surplus fund that may accrue from time to time with an intention to manage the company’s liquidity and mitigating its operational and financial risk. The said investments are only redeemed when there is necessity of funds and the same is utilized for the operational need of the company. Further I find that the appellant is not engaged in the business of trading in securities (Mutual Funds) but the investment in Mutual Fund is an investment activity and gain from return of Mutual Fund is taxed as capital gain and not as business income. Further I note that the Commissioner (Appeals) in para 14 has observed that the appellant has availed and utilized credit on common input services viz. Works Contract Services, Interior Decorator and Design Services, Architect Services etc which were used both for provision of taxable services as well as exempted services viz. trading in Mutual Fund securities and had neither maintained separate accounts in terms of Rule 6(2)(b) of Cenvat Credit Rules nor complied with the provisions of Rule 6(3)(i) or 6(3)(ii) of Cenvat Credit Rules, 2004. On these premises he has upheld the demand of 6% of the value of exempted services. This finding of the learned Commissioner (Appeals) is not tenable in law because for investment in Mutual Fund securities, appellants have not utilized any of the common input services viz. Works Contract Services, Interior Decorator and Design Services and Architect Services. Therefore, the very basis of the finding is not sustainable in law as the Department has failed to prove that these input services are also used in or in relation to the provisions of exempted services i.e. trading in securities. In the absence of such co-relation, I am of the view that Rule 6(3) is not applicable. In view of my discussion above, I am of the considered view that impugned order is not sustainable in law and therefore I set aside the same by allowing the appeal of the appellant with consequential relief, if any.
(Order was pronounced in Open Court on 25/04/2019)
