Investment in Mutual Funds Not ‘Trading’, No CENVAT Credit Reversal Required for Redemption of Units: CESTAT

The New Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that investment in mutual fund units and their subsequent redemption cannot be treated as “trading of goods” or an “exempted service” under the Finance Act, 1994 and the CENVAT Credit Rules, 2004. The bench of Justice Ajay Sharma (Judicial Member), and P.V. Subba Rao (Technical Member) has quashed the service tax demand of more than ₹1.53 crore along with interest and penalties imposed on Indiamart Intermesh Ltd. The central issue before the Tribunal was whether investment in mutual fund units by the company could be considered “trading” under Section 66D(e) of the Finance Act, 1994, thereby amounting to an outward supply of an exempt service and attracting reversal of CENVAT credit on common input services under Rule 6(3) of the CENVAT Credit Rules, 2004. Indiamart was engaged in operating an online business-to-business marketplace platform that connected buyers and suppliers. Its principal output service involved selling advertising space and time slots through web catalogues displayed on its online platform. In the course of carrying out its operations, the company availed CENVAT credit on various common input services including legal services, communication services, manpower services, maintenance, rent, training and director sitting fees. During an audit covering the period from FY 2013-14 to June 30, 2017, the department observed that the company had earned income from the sale of mutual fund units reflected under “Net Gain from Sale of Current Investments” in its financial statements. Revenue authorities treated this activity as trading in mutual funds and argued that such trading constituted an exempt service. According to the department, because the company had availed common CENVAT credit without maintaining separate accounts for taxable and exempt activities, it was required to reverse credit under Rule 6 of the CENVAT Credit Rules. A show cause notice was subsequently issued seeking recovery of ₹1.53 crore along with interest and penalties by invoking the extended limitation period. The adjudicating authority confirmed the demand and imposed an equivalent penalty along with an additional penalty of ₹10,000. The company challenged the department’s position and argued that the mutual fund units had been purchased merely as investments of surplus funds and not as stock-in-trade. It contended that it was not engaged in the business of mutual fund trading and did not possess any SEBI licence for such activity. It further submitted that redemption of mutual fund units merely extinguishes the units and returns value from the fund house, without any transfer of title to a third party. While examining the issue, the Tribunal noted that the controversy was already settled through previous judicial decisions, including Ace Creative Learning Pvt. Ltd. and Siegwerk India Pvt. Ltd. The Bench observed that in the Siegwerk decision, it had already been held that redemption of mutual fund units cannot be regarded as trading of goods because no transfer of title takes place. Instead, the units cease to exist upon redemption. The Tribunal also criticised the Commissioner (Appeals) for failing to properly appreciate binding precedents despite noting them during the proceedings. It observed that such conduct violated the principle of judicial discipline and unnecessarily prolonged litigation. In a significant legal observation, the Tribunal emphasized that before an activity can be treated as an “exempted service”, it must first qualify as a “service” under Section 65B(44) of the Finance Act, 1994. The Bench stated that a service necessarily requires one person to carry out an activity for another person for consideration. Mere investment and redemption of mutual fund units did not satisfy these essential elements. The Tribunal observed that the department had failed to identify any recipient to whom Indiamart allegedly rendered a service. Since there was no service provider-service recipient relationship and no consideration flowing from any such activity, the transactions could not be classified as services at all. CESTAT held that subscription to and redemption of mutual fund units does not amount to trading of goods under the negative list provisions and also cannot be treated as an exempted service under Rule 2(e) of the CENVAT Credit Rules. The Tribunal concluded that there was no requirement for maintaining separate books under Rule 6 and no basis for reversal of CENVAT credit, interest or penalties. The impugned order was therefore set aside and the appeal was allowed with consequential relief. Case Details Case Title: Indiamart Intermesh Ltd. Versus Commissioner ofCGST & Central Excise, Delhi Citation: JURISHOUR-1281-CES-2026(DEL) Case No.: Service Tax Appeal No. 54709 of 2023 Date: 15.05.2026 Counsel For Appellant: Atul Gupta, Chartered Accountant Counsel For Respondent: Aejaz Ahmad, Authorised Representative Click Here To Read Order Read More: Govt. May Lock GSTR-3B to Auto-Populated Data

Investment in Mutual Funds Not ‘Trading’, No CENVAT Credit Reversal Required for Redemption of Units: CESTAT

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