The Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that while the purchase and sale of shares and securities using an assessee’s own funds constitutes an investment activity and not a taxable or exempted service, an assessee is nevertheless required to proportionately reverse CENVAT credit on common input services attributable to such activity. 

The bench of Binu Tamta (Judicial Member) and P.V. Subba Rao (Technical Member) ruled that activities falling completely outside the scope of service tax law cannot enjoy the benefit of CENVAT credit on common input services used for both taxable services and non-service activities. 

The appeal was filed by a Government of India undertaking engaged in providing loans and banking and financial services. Besides rendering taxable financial services, the company also invested its own funds in purchasing and selling shares and securities.

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The Department issued a show cause notice covering the period from April 2008 to March 2011, alleging thatAppellanthad availed full CENVAT credit on common input services such as housekeeping, professional consultancy, telephone and internet services, courier services, advertisement services, and training services, despite these services being used both for taxable financial services and for the activity of purchasing and selling securities. The Department consequently sought recovery of approximately ₹89.85 lakh along with interest and penalties. 

The assessee argued that buying and selling shares on its own account amounted merely to investment of surplus funds and not “trading” or provision of any service. Therefore, Rule 6 of the CENVAT Credit Rules, which mandates reversal of credit attributable to exempted services, had no application.

The appellant further relied on several Tribunal decisions, including Ponni Sugars, Instakart Services, Cognizant Technology Solutions, and Tata Sons, which had consistently held that investment in one’s own shares or securities is not a service and cannot be treated as an exempted service requiring reversal under Rule 6.

The assessee also contended that many of the disputed input services were essentially used for providing taxable banking and financial services, and that its investment activity formed an integral part of those services. It additionally challenged the invocation of the extended limitation period and the imposition of penalties. 

The department agreed that the purchase and sale of securities using one’s own funds was not “trading” or a taxable service. However, it argued that this did not automatically entitle the assessee to retain full CENVAT credit.

According to the Department, activities which are neither manufacture nor service fall entirely outside the Finance Act, 1994, and therefore input services attributable to such activities cannot qualify for CENVAT credit. Consequently, where common input services are used partly for taxable services and partly for non-service activities, proportionate reversal of credit is legally required. 

The Bench accepted that IFCI’s purchase and sale of securities represented investment of its own funds rather than trading or provision of any service.

However, the Tribunal observed that this finding did not conclude the dispute. The real issue was whether common input services used partly for taxable services and partly for a non-service activity could continue to enjoy full CENVAT credit.

The Tribunal held that this question had already been conclusively answered by the Delhi High Court in Lally Automobiles Pvt. Ltd., whose reasoning was subsequently affirmed by the Supreme Court. The High Court had ruled that where an activity falls completely outside the ambit of both manufacturing and service tax, input tax credit attributable to that activity is unavailable, even if the activity cannot be classified as an exempted service.

The Tribunal noted that although several earlier CESTAT decisions had held investment in shares to be outside the scope of service tax, those decisions had not considered the binding judgment in Lally Automobiles. Therefore, the Tribunal considered itself bound by the Delhi High Court and Supreme Court precedents. 

Rejecting the appellant’s contention that the disputed services were used exclusively for taxable financial services, the Tribunal observed that services such as housekeeping, professional consultancy, internet facilities, courier services, advertisements and professional training are inherently common administrative services supporting the organisation as a whole.

Since these services were also used for the separate investment activity, proportionate reversal of CENVAT credit became necessary.

The Bench further observed that the company’s own records separately reflected profits earned from buying and selling securities, demonstrating that the investment activity was distinct from its taxable banking and financial services. 

The Tribunal also upheld invocation of the extended period of limitation and confirmed the penalties. Relying on Lally Automobiles, it held that failure to maintain separate records and failure to reverse proportionate credit on common input services justified extended limitation as well as penal consequences. 

The CESTAT dismissed Appellant Limited’s appeal and upheld recovery of proportionate CENVAT credit, along with the consequential interest and penalties.

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