- CESTAT : 'Special Additional Duty' construable as customs-duty; Upholds interest-levy on short CVD payment
- HC : Managing investors' money under 'trust structure' by VCF not taxable: Reverses CESTAT-order
- Textile Ministry notifies extension of RoSCTL Scheme on export of Apparel/Garments till March 31, 2026
- HC: Directs MOF to consider request to exclude specialized Laser Marking Machines from ADD-levy; Disposes writ
- Himachal Pradesh HC declares ‘Water Cess’ levy on hydropower generation as ‘unconstitutional’
Refuting 'CENVAT Credit reversal' towards Investments in Securities
Sudipta Bhattacharjee, Partner, Advaita Legal
Rajat Mittal, Senior Associate
Tushar Joshi, Associate
In today’s day and age, most companies have a Treasury division which undertakes various treasury related transactions to meet the fiscal demands, facilitate trade and manage the working capital requirements of the company.
Treasury divisions often invest in shares, stocks, mutual funds and other types of securities which constitute non-core activities for the company but help strengthen the finances of the company.
As per recent media reports, tax authorities have sent notices to various companies seeking reversal of proportionate CENVAT Credit by such companies - As per the tax authorities, ‘trading in securities’ constitutes an ‘exempt service’, therefore CENVAT credit on input/input services to the extent the said input service is exclusively or commonly attributable to ‘trading in securities’ is required to be reversed.
The main controversy pertains to erstwhile indirect tax regime i.e., the period prior to the introduction of GST – apropos erstwhile CENVAT Credit Rules, 2004 (CCR). Our analysis in the backdrop of relevant statutory provisions is as under:
Relevant Statutory Provisions
As per the scheme of CCR, CENVAT credit is allowed only to the extent the same is being used for provision of taxable goods or services. If the input/ input services are being used for the provision of an exempted goods or services, CENVAT credit on the said input/ input service is not admissible. Rule 6(1) of the CCR clearly disallows CENVAT Credit on input/ input services used in the manufacture of exempted goods or for provision of exempted services.
Rule 2(e) of the CCR defines ‘exempted service’, relevant extract of which is reproduced as under:
‘Exempted service’ means a –
(1) Taxable service which is exempt from whole of the service tax leviable thereon; or
(2) Service, on which no service tax is leviable under Section 66B of the Finance Act; or
(3) …
…”
Thus, ‘exempted service’ includes services on which service tax is not leviable under Section 66B of the Finance Act.
...It is, therefore, important to understand the levy of service tax under Section 66B of the Finance Act. Section 66B of the Finance Act provides as under:
“66B. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.
Under Section 65B(25) of the Finance Act, ‘goods’ have been defined to include ‘securities’. Further, the trading of goods is covered under the Negative List of services provided under Section 66D(e) of the Finance Act. Thus, the activities involving ‘trading of securities’ essentially equate to ‘trading of goods’ and thus, get covered by the Negative List of services. By this logic, ‘trading in securities’ may qualify as an ‘exempted service’, which will entail rigors of Rule 6(1) of the CCR.
Based on the above logic, the tax department is apparently alleging that the investments by treasury department of companies is akin to ‘trading in securities’ and therefore, covered by the Negative List of services. Furthermore, since the services in the Negative List are ‘exempt services’ as per Rule 2(e) of the CCR read with Section 66B of the Finance Act, the companies are required to reverse proportionate CENVAT credit since Rule 6(1) of the CCR disallows CENVAT Credit to be used for provision of exempted services.
Legal arguments that may be explored against aforesaid demand of proportionate reversal of CENVAT Credit on investments
Following arguments can be explored against any such demand of proportionate reversal of CENVAT Credit on investment by Companies:
(1) Investment in securities by the companies does not necessarily involve ‘trading in securities’
The term ‘trading’ has not been defined under the CCR or the Finance Act; therefore, it has to be understood as per the ordinary dictionary meaning of the term.
...The dictionary meaning of ‘trading of goods’ is "act of buying and selling goods in the course of business". Section 2(h) of the Central Excise Act, 1944 defines ‘sale and purchase’ to mean “any transfer of the possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuable consideration”.
This implies that for an activity to be termed as ‘trading in securities’, it has to be done in the ordinary course of business i.e., there has to be some degree of regularity or continuity for an activity of buying and selling securities to be termed as ‘trading’. Mere purchase or investment in mutual funds / shares cannot qualify as ‘trading of securities’. Thus, ‘trading’ needs to be differentiated from mere investments by the companies.
In fact, the issue as to whether a particular transaction constitutes ‘trading activity’ or ‘investment’ has been a subject matter of debate since long under the Income Tax law.
The Courts in myriad cases have dealt with the issue and laid down certain determinative tests and principles to ascertain if an activity involving the purchase and sale of securities is primarily ‘an investment’ or ‘an activity in the nature of trade’. The test is primarily to ascertain the intention of the party behind the purchase of securities, i.e., whether the sole or dominant intention of the party behind the purchase of the securities was to resell the same at a profit or the intention was to hold the security if a really high price was not offered and sell the same subsequently.
...Thus, not every purchase and sale of securities, by implication, becomes an activity of trading in securities. The two are distinct and separate concepts. Therefore, all such companies which invest their surplus funds by purchasing securities of various types cannot be said to be trading in securities.
Assessees / companies will do well to analyze their investment patterns and bolster this factual argument that what they have undertaken is ‘investment’ which needs to be understood in contradistinction to ‘trading of securities’.
(2) Inputs/ Input Services cannot be said to be used in relation to provision of exempted service ‘trading in securities’
A perusal of Rule 6(1) of the CCR would reveal that CENVAT Credit of inputs/ input services is not available which are used in or in relation to the provision of exempted services. Even if it is assumed for arguments sake that the companies are engaged in ‘trading in securities’, it can be argued that no input/ input services can be said to be used in or in relation to the provision of that exempted service (ie.,
...In this regard, an inference may be drawn from the jurisprudence on the issue of emergence of non-excisable by-product during the course of manufacture of excisable final product. The law has been clear - CENVAT credit on input/ input services is not required to be reversed if there is an emergence of a non-excisable by-product during the course of manufacture of excisable final product. The rationale is that inputs cannot be said to be used or attributable to the manufacture of non-excisable product. One cannot use a lesser quantum of the inputs to manufacture the same quantity of the ‘final product’ being manufactured and prevent the non-excisable by-product from arising.
Extrapolating the foregoing in the context of investments by treasury departments of companies, one can forcefully argue that none of the input/ input services of the company can be attributed to the activity of ‘trading in securities’ and therefore, reversal of CENVAT Credit on these services is not warranted. It is not as if any lesser amount of these input/ input services would have been utilized by the concerned company to manufacture the same quantity of final product or provide output service as the case may be. Even if the concerned company was not engaged in ‘trading in securities’, it would have still continue to use the same quantum of the above-mentioned input/ input services. Therefore, it cannot be said that inputs/ input services such as renting of office building, legal services, audit services, etc. are used in or in relation to the provision of exempted services (‘trading in securities’).
(3) Trading is not a ‘service’, let alone an ‘exempted service’
It is clear from Rule 6(1) of the CCR that reversal of CENVAT Credit is warranted only where the output is an ‘exempted service’. In this regard, it is important to note that for an activity to qualify as ‘exempted service’, it should first be a ‘service’ in terms of Section 65B(44) of the Finance Act, which has been reproduced hereunder for ready reference:
“Section 65B.
...…(44) “service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-
(a) an activity which constitutes merely,–
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner…”
Thus, specific exclusion from the definition of ‘service’ is given to transactions involving ‘transfer of title in goods or immovable property by the way of sale’. Since trading in security involves transfer of title in goods, the activity of ‘trading in securities’ cannot be said to be a service.
However, the tax department might resist this argument in light of the specific Explanation 3 to Rule 6(1) of the CCR which provides that – for the purpose of this rule, exempted services as defined in clause (e) of Rule 2 shall be an activity which is not a ‘service’ as defined in Section 65B(44) of the Finance Act. It can be argued that such an explanation in the CENVAT Credit Rules, which is a subordinate legislation is going beyond the statute [i.e. Section 65B (44) of the Finance Act] and is therefore, vulnerable to constitutional challenge.
Closing comments on the above
Given the above discussion, an assessee/company can defend against such notices if it establishes that - (a) funds utilized by it in investing in shares / mutual funds or any other kind of security does not tantamount to ‘trading in securities’, (b) inputs/ input services cannot be said to be used in or in relation to ‘trading in securities’ and (c) ‘trading in securities’ is not a service, let alone an ‘exempted service’.
Moreover, under GST, Input Tax Credit attributable to transaction in securities is specially disallowed and there does not seem to be any clinching legal argument to defend non-reversal of such credit – however, if no other option remains, one may still try to contest on the basis of ground (2) above i.e.
...