Mutual Fund Investments By Indiamart Not 'Trading', CESTAT Delhi Sets Aside ₹1.53 Crore CENVAT Demand

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT) at New Delhi, has set aside a ₹1.53 crore service tax demand, along with interest and penalties, against Indiamart Intermesh Ltd. It held that the company's investment in and redemption of mutual fund units could not be treated as an exempt service for the purpose of denying CENVAT credit.

“The mere investment in mutual fund units by the Appellant and the subsequent redemption of those units does not involve the rendering of any activity by the Appellant for any other person for consideration,” the tribunal said.

A coram of Judicial Member Ajay Sharma and Technical Member P.V. Subba Rao held that since Indiamart was not rendering any service to another person through these transactions, reversal of CENVAT credit could not be demanded.

The dispute arose from an audit covering FY 2013-14 to June 30, 2017. During the audit, the department found that Indiamart had received income from sale of mutual fund units, reflected in its financial statements under the head “Net Gain from Sale of Current Investments.”

The Revenue treated this as trading in mutual funds falling within the negative list of services. It therefore classified the activity as an exempt service.

The department alleged that since the company had availed common CENVAT credit on input services used for both taxable and exempt activities without maintaining separate accounts, reversal of CENVAT credit was required.

A show cause notice dated April 8, 2019, proposed recovery of ₹1,53,77,628 along with interest and penalties. The adjudicating authority confirmed the demand in February 2022, and the Commissioner (Appeals) upheld that decision.

Indiamart argued that the mutual fund units were acquired only as investments of surplus funds and not as stock-in-trade. It said it was not engaged in the business of trading mutual funds and did not hold any SEBI licence for such activity.

The company also argued that upon redemption, the units are extinguished and revert to the fund house. They are not transferred to any third party.

“The Revenue has entirely failed to identify any other party to whom the Appellant is said to have rendered a service. Accordingly, the activity in question does not amount to a 'service',” the tribunal observed.

The Revenue, on the other hand, argued that the purchase and redemption of mutual fund units amounted to trading of goods. It said this constituted exempt services attracting reversal of CENVAT credit.

Agreeing with earlier tribunal rulings, CESTAT held that redemption of mutual fund units does not involve transfer of title to a third party. It said the transfer of title is an essential feature of trading.

“The subscription to and redemption of mutual fund units by the Appellant does not constitute 'trading of goods' within the negative list under Section 66D(e) of the Finance Act, 1994, and does not amount to an 'exempted service' within the meaning of Rule 2(e) of the CENVAT Credit Rules, 2004,” the bench held.

Holding that no obligation arose to maintain separate books in these circumstances, the tribunal set aside the impugned order and allowed the appeal with consequential relief.

For Appellant: Atul Gupta, Chartered Accountant

For Respondent: Aejaz Ahmad, Authorised Representative