Pan Masala, Tobacco Profits Invested In Mutual Funds Not 'Trading In Securities', Service Tax Not Applicable: CESTAT Delhi

The Delhi Bench, Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside service tax demand on the activity of investing in Mutual Funds as such activities undertaken by Godfrey Phillips India Limited (Appellant) would be different from 'trading in securities' and cannot be considered as an exempted service in terms of section 66D(e) of the Finance Act. In an order dated December 05, 2025 the Bench comprising Justice Dilip Gupta (President) and Shri. P..V. Subba Rao (Technical Member) observed that 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 therefore, not an activity relating to trading and securities. The Appellant was engaged in multiple taxable services (like management or business consultant service, consulting engineer service, manpower recruitment/supply agency service, business auxiliary service, renting of immovable property service, legal consultancy service and sponsorship services). Appellant invested the Profits from sale of cigarettes, pan masala, and tobacco products into Mutual Funds. For the Financial Year 2013-2014 to 2017-2018, an Audit observation came to light wherein the Service Tax Department reckoned that Appellant was engaged in trading of securities but did not maintain any separate account for the same. This led to a demand of ₹ 4,80,06,500 under section 73(1) of the Finance Act read with CENVAT Credit Rules. Order-In-Original held that subscription and redemption of Mutual Funds was an exempted service as it fell under the ambit of “Trading of Goods” as provided under section 66D(e) of the Finance Act. The CESTAT relied upon a bevy of decisions to hold that subscription/redemption of Mutual Fund units was not 'trading of securities' on the following counts (i) on redemption mutual funds units cease to exist (ii) redemption and subscription of mutual funds was management of investment. To corroborate this finding, the CESTAT relied on the rationale in case of Siegwerk India which the issue of Reversal of CENVAT credit on subscription and redemption of Mutual Funds, activity of trading of securities, subscription and redemption. On whether reversal of CENVAT credit was warranted for the activity of subscription and redemption of units of Mutual Funds, the CESTAT answered in negative. As opposed to the understanding of the Service Tax Department that Rule 6(3) of the CENVAT Credit Rules was applicable, the CESTAT explained how activity of subscription and redemption of units of Mutual Funds cannot be said to be an activity of sale and purchase of securities. The CESTAT held that when the units of Mutual Funds are redeemed, the units cease to exist and do not get transferred to a third party and therefore, Proportionate reversal of CENVAT credit not required under Rule 6. Accordingly, the CESTAT allowed appeal of the Appellant and quashed the order levying service tax on the activity of subscription and redemption of Mutual Funds along with interest, penalty. Case Detail: Godfrey Phillips India Limited vs. Commissioner Central Tax For Appellant: Advocates S.C. Vaidyanathan, Shivam Batra For Respondent: Mr. Aejaz Ahmad (Authorized Representative)Click Here To Read/Download Order

Pan Masala, Tobacco Profits Invested In Mutual Funds Not 'Trading In Securities', Service Tax Not Applicable: CESTAT Delhi

Parul Bose

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