Godfrey Phillips India Limited vs Commissioner, Central Tax, New Delhi [Service Tax Appeal No. 51478 Of 2022] Dated December 5, 2025

Activity of subscription and redemption of units of Mutual Funds cannot be said to be an activity of sale and purchase of the securities and hence does not attract CENVAT Credit reversal

BRIEF FACTS OF THE CASE

• The asses see was engaged in the business of manufacturing goods and providing services. The surplus profit earned by the assessee was invested in various schemes of Mutual Funds. The asses see made redemptions as and when required.
• The department confirmed the demand for recovery of CENVAT credit along with interest and penalties observing that the redemption of Mutual Funds is an exempted service as it falls under the ambit of Trading of Goods'' as provided under section 66D(e) of the erstwhile Chapter V of the Finance Act, 1994 warranting reversal of CENVAT credit there on in terms of Rule 6(3)(i) of the CENVAT Credit Rules 2004.
• Aggrieved by the demand order, the asses see preferred an appeal before the CESTAT, New Delhi.

KEY OBSERVATIONS OF THE TRIBUNAL

• TheTribunal referred to the ruling delivered by the Division Bench of Delhi CESTAT in the case of M/s. Siegwerk India Pvt. Ltd¹, wherein it was held that the activity of subscription and redemption of the units of mutual funds cannot be said to be an activity of sale and purchase of the securities.
• Whenthe units of mutual funds are redeemed, the mutual fund units cease to exist. Thus, investment activities undertaken by the appellant would be different from 'trading in securities'.
• According, it was held that the activity of subscription and redemption of units of Mutual Funds cannot be said to be an activity of sale and purchase of the securities. It would, therefore, not be an activity relating to trading and securities. The activity undertaken by the asses see would, therefore, not be an exempted service in terms of section 66D(e) of the Finance Act and proportionate reversal of credit was not required to be made.
• Thus, the appeal was allowed in favour of the asses see.

AURTUS COMMENTS

• While this ruling was delivered in the context of the service tax regime, it has significant implications for the GST framework. Under GST, the law refers to ‘transaction in securities', a term that is broader than ‘trading in securities' and could potentially cover a wider range of activities. However, for input tax credit (ITC) reversal to be triggered under GST, there must be a ‘sale value', i.e., a transfer of title for consideration.
• In the case of open-ended mutual fund redemptions, the units are extinguished and not transferred to any third party, resulting in no sale value and, consequently, no exempt supply value for ITC reversal purposes. The GST regime does introduce a statutory deeming fiction, whereby 1% of the sale value of securities is considered as the value of exempt supply for the purposes of ITC reversal under Rules 42 and 43 of the GST Rules. Practically, this means that for transactions where there is an actual sale of securities such as the sale of closed-ended mutual fund units or ETFs to third parties 1% of the sale value can be considered for ITC reversal. However, for redemptions of open-ended mutual fund units, where there is no transfer of title and nosalevalue arises, the machinery provision for reversal fails, and it is a settled principle of law that wherethe machineryprovisionfails, the corresponding levycannot be sustained.
• In addition to the above, several further arguments can be advanced to support the non reversal of credit:
  • Firstly, the GST law defines ‘exempt supply' as a supply of goods or services that is exempt from tax or attracts a nil rate and includes non-taxable supplies. However, since ‘securities' are expressly excluded from the definitions of both ‘goods' and ‘services' under GST, transactions in securities do not constitute a ‘supply' in the first place. This raises a fundamental question as to whether the reversal provisions, which are predicated on the existence of an exempt supply, canbevalidly applied to transactions in securities.
  • Secondly, the measure of reversal based on an arbitrary percentage of notional sale value, rather than actual use of common input services, can be argued to be excessive and not in line with the principle of proportionality.
• Finally, the legislative intent behind the reversal provisions was to restrict credit only in cases of regular trading activity, not for one-off or investment transactions such as mutual fund redemptions, which arefundamentally different in character.
• Itis important to note, however, that the broader language of GST law and the lack of definitive judicial precedent on the interpretation of “sale value” under GST may give rise to litigation, as authorities could seek to apply the 1% reversal even to redemptions, despite the legal basis for such an approach being questionable. Notably, a recent order by Gujarat AAAR in the case of M/s Zydus Lifesciences Ltd [Advance Ruling (Appeal) No. GUJ/GAAAR/APPEAL/2025/18] has taken an unfavourable view of this matter, heightening uncertainty and the risk of divergent interpretations by tax authorities.

Footnote

1. M/s. Siegwerk India Pvt. Ltd. vs. Commissioner, CGST, Commissionerate, Alwar [ST Appeal No. 53816 of 2018 decided on 01.10.2024 (Tri.-Del.)]

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