Instakart Services Pvt. Ltd. Vs Commissioner of Central Tax (CESTAT Bangalore)
Summary: The Customs, Excise & Service Tax Appellate Tribunal, Bangalore Regional Bench, considered Service Tax Appeal No. 21017 of 2019 filed by M/s. Instakart Services Pvt. Ltd. against Order-in-Original No. 16/ST/COMMR/2018 dated 26.12.2018 passed by the Commissioner of Central Tax, Bangalore. Final Order No. 20415/2024 was pronounced on 13.03.2024.
The appellant was discharging Service Tax both as a service provider and recipient of services and was availing CENVAT credit on input services for payment of its Service Tax liability. During audit, the Department took the view that during July 2015 to September 2016 the appellant had traded in Mutual Funds but had failed to discharge 6%/7% of the value under Rule 6(3) of the CENVAT Credit Rules, 2004. The Department also alleged that Service Tax was payable on amounts received from employees towards waiver of the notice period on leaving employment.
A show-cause notice consequently demanded Rs.7,75,11,889/- towards 6%/7% of the value attributed to mutual fund trading and Rs.7,84,641/- as Service Tax on notice-period waiver charges recovered from employees during December 2015 to September 2016, along with interest and penalty. The demands were confirmed in adjudication.
On the mutual fund issue, the appellant contended that investment and redemption of mutual funds did not constitute rendering of a service or trading in goods and therefore could not constitute an exempted service for purposes of Rule 6 of the CENVAT Credit Rules, 2004. The appellant relied on several decisions, including Ruchi Infrastructure Ltd. vs. CCE & ST, Indore, Mormugao Port Trust vs. CCE & ST, Goa, Commissioner of CGST & CE vs. Edelweiss Financial Services Ltd., Space Matrix Designs Consultants (P.) Ltd. vs. Commissioner of Central Tax, Bangalore North, Ace Creative Learning (P.) Ltd. vs. Commissioner of Central Tax, [2021] 126 taxmann.com 215, United Racing and Blood Stock Breeders Ltd. vs. Commissioner of Central Tax, Bangalore, M/s Indiabulls Securities Ltd. vs. CCE and Ambuja Cements Ltd. v. Commissioner of Customs, Central Excise & GST Nagpur.
The Tribunal identified the first issue as whether 6% or 7% was payable on the differential value of mutual fund investment and realisation under Rule 6(3)(i) of the CENVAT Credit Rules, 2004 on the footing that the investment constituted an exempted service.
The Tribunal found that the appellant was investing its surplus funds in mutual funds and was not trading in securities. It relied particularly on the decision in Ace Creative Learning (P.) Ltd., where the Tribunal had considered investment in mutual funds and held that redemption of mutual fund units was different from trading. The Tribunal also noted the reasoning that an investor who merely invests in mutual funds and earns profit cannot be termed a service provider in respect of that investment activity.
The Tribunal observed that the principle laid down in Ace Creative Learning had subsequently been followed in Ambuja Cement Ltd. and United Racing and Blood Stock Breeders Ltd., and that no contrary decision had been placed by the Revenue. Following those precedents, the Tribunal held that investment in mutual funds by the appellant could not be considered an activity involving exempted services or sale/trading of exempted goods. The demand on this count therefore could not be sustained.
On the notice-period recovery issue, the appellant submitted that amounts recovered from employees who left without serving the contractual notice period were attributable to the employment contract and could not be regarded as consideration for a service rendered by the employer to the employee. The appellant relied upon several decisions, including Rajasthan Rajya Vidhyut Prasaran Nigam Ltd., GE T & D India Ltd. vs. Deputy Commissioner of Central Excise, Amit Metaliks Ltd., Madhya Pradesh Poorva Kshetra Vidyut Vitran Co. Ltd., Rajcomp Info Service Ltd., South Eastern Coalfields Ltd., M/s Balaji Medical and Diagnostic Research Centre, M/s Bharat Dynamics Ltd., M/s KJS Cement Ltd., M/s Shriram Pistons & Rings Ltd. and XL Health Corporation India (P.) Ltd..
The Tribunal considered its earlier decision in XL Health Corporation India (P.) Ltd., which had held that notice pay under an employment contract could not be considered a taxable service because neither party rendered a service to the other in relation to the notice pay. The Tribunal also relied upon the Madras High Court decision in GE T & D India Limited Vs Deputy Commissioner of Central Excise, which held that the employer could not be said to have rendered a taxable service merely by permitting the employee to exit upon payment of a cost for the sudden exit.
The Tribunal further noted that, relying upon the Madras High Court judgment, it had held in M/s. Intas Pharmaceuticals and M/s. Rajasthan Vidhyut Prasaran Nigam Ltd. that compensation paid by an employee to the employer for resigning without requisite notice would not constitute consideration for the contract of employment and would not fall within taxable service.
Following those precedents, the Tribunal held that the Service Tax demand on charges recovered by the appellant from employees in lieu of the notice period also could not be sustained.
The Tribunal therefore set aside the impugned order and allowed the appeal with consequential relief, if any, as per law.
Cases Discussed
- Ruchi Infrastructure Ltd. vs. CCE & ST, Indore, 2020 (37) GSTL 236 (Tri. Del.) — cited by the appellant in support of the contention that investment in mutual funds does not amount to rendering a service.
- Mormugao Port Trust vs. CCE & ST, Goa, 2017 (48) STR 69 (Tri.-Mumbai) — cited by the appellant concerning the elements necessary for a transaction to constitute a taxable service.
- Commissioner of CGST & CE vs. Edelweiss Financial Services Ltd., [2023] 149 taxmann.com 76 (SC) — cited by the appellant on the mutual fund investment issue.
- Space Matrix Designs Consultants (P.) Ltd. vs. Commissioner of Central Tax, Bangalore North, [2021] 127 taxmann.com 51 (Bangalore – CESTAT) — cited by the appellant on the mutual fund investment issue.
- Ace Creative Learning (P.) Ltd. vs. Commissioner of Central Tax, [2021] 126 taxmann.com 215 (Bangalore CESTAT) — followed on the proposition that investment and redemption of mutual funds could not be treated as trading or an exempted service for purposes of Rule 6.
- United Racing and Blood Stock Breeders Ltd. vs. Commissioner of Central Tax, Bangalore, 2023 (5) TMI 84 — noted as having subsequently followed the principle concerning investment in mutual funds.
- M/s Indiabulls Securities Ltd. vs. CCE, 2018 (1) TMI 1087-CESTAT New Delhi — cited by the appellant concerning investment in mutual funds.
- Ambuja Cements Ltd. v. Commissioner of Customs, Central Excise & GST Nagpur, 2023 (5) TMI 806 — noted as having subsequently followed the principle concerning mutual fund investments.
- Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. vs. CGST, Customs and Central Excise, [2022] 135 taxmann.com 6 (New Delhi – CESTAT) — cited on the taxability of amounts recovered for failure to serve the contractual notice period.
- GE T & D India Ltd. vs. Deputy Commissioner of Central Excise, [2020] 119 taxmann.com 55 (Madras) — relied upon for the proposition that notice pay does not constitute consideration for a taxable service.
- Amit Metaliks Ltd. vs. Commissioner of Central Goods & Service Tax, Bolpur, [2021] 127 taxmann.com 248 (Kolkata – CESTAT) — cited on the notice-period recovery issue.
- Madhya Pradesh Poorva Kshetra Vidyut Vitran Co. Ltd. vs. Principal Commissioner CGST and Central Excise, Bhopal, [2021] 126 taxmann.com 181 (New Delhi – CESTAT) — cited on the taxability of contractual compensation.
- Rajcomp Info Service Ltd. vs. Commissioner of Central Excise Commissionerate, Jaipur, [2022] 141 taxmann.com 223 (New Delhi – CESTAT) — cited on the notice-period recovery issue.
- South Eastern Coalfields Ltd. vs. Commissioner of Central Excise and Service Tax, [2021] 124 taxmann.com 174 (New Delhi – CESTAT) — cited on the notice-period recovery issue.
- M/s Balaji Medical and Diagnostic Research Centre v. Principal Commissioner, Central Goods and Service tax (East Delhi), New Delhi, 2023 (12) TMI 748-CESTAT New Delhi — cited on the notice-period recovery issue.
- M/s Bharat Dynamics Ltd. v. Commissioner of Central Tax, Hyderabad, 2022 (9) TMI 1445-CESTAT Hyderabad — cited on the notice-period recovery issue.
- M/s KJS Cement Ltd. v. Commissioner of CGST, Central Excise & Customs Jabalpur, (MP), 2023 (12) TMI 903-CESTAT Delhi — cited on the notice-period recovery issue.
- M/s Shriram Pistons & Rings Ltd. v. Commissioner of Central Tax, Ghaziabad, 2020 (3) TMI 844 CESTAT Allahabad — cited on the notice-period recovery issue.
- XL Health Corporation India (P.) Ltd. vs. Commissioner of Central Tax, [2022] 138 taxmann.com 437 (Bangalore CESTAT) — considered and relied upon for the proposition that notice pay under an employment contract is not consideration for a taxable service.
- M/s. Intas Pharmaceuticals — referred to as a Tribunal decision which, relying upon the Madras High Court judgment, held that compensation paid by an employee for resignation without requisite notice would not constitute consideration for the contract of employment.
FULL TEXT OF THE CESTAT BANGALORE ORDER
This appeal is filed against Order-in-Original No.16/ST/COMMR/2018 dated 26.12.2018 passed by the Commissioner of Central Tax, Bangalore South Commissionerate.
2. Briefly stated the facts of the case are that the appellants are discharging Service Tax for rendering service as well as recipient of service. They also availed CENVAT credit on input services and utilizing the same in discharging their Service Tax liability. During the course of audit of the records, it came to the notice of the department that during the period July 2015 to September 2016, though they were trading in Mutual Funds but failed to discharge 6% / 7% of the value under Rule 6(3) of Cenvat Credit Rules, 2004 (CCR); also, the appellant has not paid Service Tax on the amount received from their employees for waiver of notice period on leaving the employment. Consequently, show-cause notice was issued demanding an amount of Rs.7,75,11,889/- being 6% / 7% of the value of traded service i.e., mutual funds; and Rs.7,84,641/- Service Tax not paid on the amount received on waiver of notice period charges from the employees during the period December 2015 to September 2016 with interest and penalty. On adjudication, the demands have been confirmed with interest and penalty. Hence, the present appeal.
3. At the outset, the learned Senior Advocate for the appellant has submitted that the demand has been confirmed on investment in mutual funds considering the same as an activity of trading of goods, which was an exempted service for the purpose of Service Tax as per Section 66B and 66D(e) of the Act and Rule 2 of the CCR, 2004; further, he has submitted that the learned Commissioner has held that the amount is payable by the appellant as per Rule 6(3)(i) of CCR, 2004 since the appellant had availed credit on common input services used for both taxable and exempted services, but failed to maintain separate accounts. He has submitted that investment and redemption of mutual funds does not amount to rendering any service and also cannot constitute ‘trading’ in goods (Mutual Funds). Therefore, Rule 6(1) of CCR, 2004, itself would have no application as the transaction would not qualify as service or as an exempted service. In the present case, the appellant was only rendering taxable services, therefore, the Sub-Rule 6(1) of CCR, 2004 will not apply. Consequently, the Sub-Rule (2) and (3) of Rule 6 of CCR, 2004 accordingly cannot be held to be applicable when subrule (1) itself is not attracted.
3.1 Further, he has submitted that an activity can qualify as a service only on existence of three essential elements viz., service provider, service receiver and a consideration for undertaking such activity. In the present case, all these essential elements to constitute service are completely absent; the activity is only investment in mutual funds and redemption thereof by the appellant. Therefore, there is no service provider, service receiver or a consideration involved in the said activity i.e., investment in mutual funds on their own account. Therefore, the investment in mutual fund also cannot be considered as an exempted service. In support, he has referred to the following judgments:
a. Ruchi Infrastructure Ltd. vs. CCE & ST, Indore, 2020 (37) GSTL 236 (Tri. Del.)
b. Mormugao Port Trust vs. CCE & ST, Goa, 2017 (48) STR 69 (Tri. – Mumbai)
c. Commissioner of CGST & CE vs. Edelweiss Financial Services Ltd., [2023] 149 taxmann.com 76 (SC)
d. Space Matrix Designs Consultants (P.) Ltd. vs. Commissioner of Central Tax, Bangalore North, [2021] 127 taxmann.com 51 (Bangalore – CESTAT)
e. Ace Creative Learning (P.) Ltd. vs. Commissioner of Central Tax, [2021] 126 taxmann.com 215 (Bangalore CESTAT)
f. United Racing and Blood Stock Breeders Ltd. vs. Commissioner of Central Tax, Bangalore: 2023 (5) TMI 84
g. M/s Indiabulls Securities Ltd. vs. CCE, 2018 (1) TMI 1087-CESTAT New Delhi
h. Ambuja Cements Ltd. v. Commissioner of Customs, Central Excise & GST Nagpur, 2023 (5) TMI 806 [Pg. 27A to 27L of Compilation]
3.2 On the issue of demand of Service Tax on the amount of charges recovered by the appellant from their employees who had not served the notice period in terms of employment contract is also not tenable. The amount recovered from the employees who leave the job without serving the notice period is merely on account of employment contract which cannot be regarded as services rendered as the contract of employment does not contemplate provision of service by the appellant to the employee. Thus, there is no service in the instant case and accordingly, Service Tax demand is bad in law. In support, he has referred to the judgment of this Tribunal in the following cases:
a. Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. vs. CGST, Customs and Central Excise, [2022] 135 taxmann.com 6 (New Delhi – CESTAT)
b. GET & D India Ltd. vs. Deputy Commissioner of Central Excise, [2020] 119 taxmann.com 55 (Madras)
c. Amit Metaliks Ltd. vs. Commissioner of Central Goods & Service Tax, Bolpur, [2021] 127 taxmann.com 248 (Kolkata – CESTAT)
d. Madhya Pradesh Poorva Kshetra Vidyut Vitran Co. Ltd. vs. Principal Commissioner CGST and Central Excise, Bhopal, [2021] 126 taxmann.com 181 (New Delhi – CESTAT)
e. Rajcomp Info Service Ltd. vs. Commissioner of Central Excise Commissionerate, Jaipur, [2022] 141 taxmann.com 223 (New Delhi – CESTAT)
f. South Eastern Coalfields Ltd. vs. Commissioner of Central Excise and Service Tax, [2021] 124 taxmann.com 174 (New Delhi – CESTAT)
g. M/s Balaji Medical and Diagnostic Research Centre v. Principal Commissioner, Central Goods and Service tax (East Delhi), New Delhi, 2023 (12) TMI 748-CESTAT New Delhi
h. M/s Bharat Dynamics Ltd. v. Commissioner of Central Tax, Hyderabad, 2022 (9)TMI 1445-CESTAT Hyderabad
i. M/s KJS Cement Ltd. v. Commissioner of CGST, Central Excise & Customs Jabalpur, (MP), 2023 (12) TMI 903-CESTAT Delhi
j. M/s Shriram Pistons & Rings Ltd. v. Commissioner of Central Tax, Ghaziabad, 2020 (3) TMI 844 CESTAT Allahabad
k. XL Health Corporation India (P.) Ltd. vs. Commissioner of Central Tax, [2022] 138 taxmann.com 437 (Bangalore CESTAT)
4. Learned Authorized Representative for the Revenue reiterated the findings of the learned Commissioner.
5. Heard both sides and perused the records. The issues involved in the present appeal for determination are: (i) whether the amount 6% or 7% on is payable on the differential value of mutual fund investment and realization under Rule 6(3)(i) of CCR, 2004 being an exempted service; (ii) amount recovered from the employees in lieu of service period on leaving the employment is leviable to Service Tax.
6. The appellants are investing their surplus in mutual funds and not traded the same as securities. The Revenue considering such investment in mutual fund which later sold by the appellant, as trading in goods, accordingly is an exempted service, hence demanded 6% / 7% of the value under Rule 6(3)(i) of the CCR, 2004 as common input services were used in providing taxable services and exempted service. We find that this issue is no more res integra since considered in a series of judgments of this Tribunal. In Ace Creative Learning (P.) Ltd. case (supra), this Tribunal analyzing the provisions applicable to investment in mutual funds held as follows:
“5. After considering the submissions of both the parties and perusal of the material on record, I find that the appellant is providing Commercial Training and Coaching Services and they have also invested in the mutual funds and have earned profit during the year 2014-15, 2015-16 & 2016-17 which they have shown as under the head “other income”. The Department has wrongly considered the investment in mutual fund as trading in mutual funds and has issued a notice on the presumption that the appellant is providing exempted services which is trading in mutual funds and has not maintained separate records for common input services availed in providing the output services and exempted activity i.e. trading and hence are liable to pay 6%/7% of the amount of exempted services. Further I find that the ‘trading’ has not been defined under the Service Tax but in the context of securities, ‘trading’ means an activity where a person is engaged in selling the goods and occupy for the purpose of making profit but certainly trading is different from redemption of mutual fund units, in the present case appellant cannot transfer the mutual fund units to third party and give only by redemption to the mutual fund because the appellant is not permitted to trade mutual fund unit in the absence of a license from the SEBI. There is a restriction on the right to transfer unit and the appellant cannot transfer units to any other person. Further I find that the appellant cannot be termed as “service provider” because he only makes an investment in the mutual fund and earn profit from it which is shown in the Books of Accounts under the head “other income”. Hence the question of invoking Rule 6 does not arise and I am of the view that Department has wrongly invoked the provisions of Rule 6(3) demanding the reversal of credit on the exempted services. I also find that substantial demand is timebarred as during the audit, the Department entertained the view that the appellant is engaged in providing the exempted services and consequently issued the show cause notice. The appellant has been filing the returns under the taxable service of ‘Commercial Training and Coaching and has provided all the records to the Department during the course of investigation and has not suppressed any material fact from the Department and in view of the various decisions relied upon by the appellant, extended period cannot be invoked where the Revenue’s case is based on Balance Sheet and income return and other records of the assessee. In view of my discussion above, I am of the considered view that the impugned order is not sustainable in law and the same is set aside by allowing the appeal of the appellant.”
6.1 The laid down principle has been followed subsequently by the Tribunal in Ambuja Cement Ltd.’s case (supra) and United Racing and Blood Stock Breeders Ltd. (supra). No contrary decision has been placed by the Revenue.
6.2 Thus, following the said precedents, it can safely be inferred that the investment in mutual funds by the appellant cannot be considered as an activity involving exempted services nor sale/trading of exempted goods. Thus, the demand on this count cannot be sustained.
7. On the issue of recovery of the amount from the employees for not serving the notice period on leaving the employment, we find that it has been considered by this Tribunal in XL Health Corporation India (P.) Ltd. case. Following the principle laid down in earlier judgments, this Tribunal held as follows:
“6. The term ‘notice pay’ mentioned in the employment contract cannot be considered as a service, more specifically as the taxable service inasmuch as neither of the parties to the contract have provided any service to each other. Thus, the phrase ‘service’ defined in Section 65B (44) ibid and ‘declared service’, as defined in Section 65B (22) are not applicable for consideration of such activity as a service for the purpose of levy of service tax. Further, the amount received as compensation by the appellants cannot be equated with the term ‘consideration’ inasmuch as the latter is received for performance under the contract; whereas, the former is received, if the other party fails to perform as per the contractual norms. We find that the issue arising out of the present dispute is no more open for any debate, in view of the judgments relied upon by the learned Consultant for the appellants. The Hon’ble Madras High Court in the case of GE T & D India Limited (supra) has held that in absence of rendition of any taxable service, the amount received as consideration cannot be termed as taxable service for the purpose of levy of service tax thereon. The relevant paragraph in the said judgment is extracted herein below:
“11……the employer cannot be said to have rendered any service per se much less a taxable service and has merely facilitated the exit of the employee upon imposition of a cost upon him for the sudden exit. The definition in clause (e) of Section 66E as extracted above is not attracted to the scenario before me as, in my considered view, the employer has not “tolerated‟ any act of the employee but has permitted a sudden exit upon being compensated by the employee in this regard.
12. Though normally, a contract of employment qua an employer and employee has to be read as a whole, there are situations within a contract that constitute rendition of service such as breach of a stipulation of noncompete. Notice pay, in lieu of sudden termination however, does not give rise to the rendition of service either by the employer or the employee.”
7. Further, we also find that by relying upon the above judgment of Hon’ble Madras High Court, this Tribunal in the case of M/s. Intas Pharmaceuticals (supra) and M/s Rajasthan Vidhyut Prasaran Nigam Ltd. (supra) has held that any compensation paid by the employee to the employer for resigning from the service without giving the requisite notice, would not be termed as consideration for the contract of employment and as such, would not fall within the preview of taxable service.
7.1 In view of the above precedent, the demand of Service Tax on the charges recovered by the appellant from the employees in lieu of notice period, also cannot be sustained.
8. In the result, the impugned order is set aside and the appeal is allowed with consequential relief, if any, as per law.
(Order dictated and pronounced in Open Court.)
