Facts

• The Applicant invested its surplus funds in various mutual fund units floated by Asset Management Companies (AMC), whereby the units were purchased directly from the fund house or through an authorized broker. Further, units of mutual funds were not transferred/ sold to other buyers unlike equity shares but were returned back to the AMC
• The Applicant received various inputs and input services, which were commonly received towards both taxable supplies as well as the activity of investment & redemption in the mutual fund units. The Applicant contended that it was not required to reverse the ITC availed on receipt of such common inputs & input services on the following basis:
• In case of mutual fund schemes, there was no purchase or sale involved since the investor only subscribed to the units of the fund and redeemed it
• Value of exempt supply included transactions in securities, however, since money and securities were excluded from definition of ‘goods’ and ‘service’, redemption of mutual funds could not be termed as an exempt supply
• In terms of Rule 42, the value of ‘transaction in securities’ would be 1% of the sale value of securities, however, redemption of mutual fund unit was distinct from sale and hence the mechanism prescribed would be inapplicable in case of redemption of mutual funds

Issues for consideration before the Authority

• Whether the Applicant was eligible to avail ITC of tax paid on common inputs and input services used in relation to the subscription and redemption of mutual funds?

Discussion and Ruling

• The Applicant was not entitled to take credit of ITC charged on any supply of goods or services or both which were not used or intended to be used in the course of furtherance of business
• A conjoint reading of the definitions provided under the Central Goods and Service Tax Act (‘the CGST Act’), the activity undertaken by the Applicant, i.e., subscription and redemption of mutual funds was neither a supply of goods nor supply of services. Since subscription and redemption of mutual funds did not involve goods or services, it did not meet the primary condition required for availing ITC
• The term ‘redemption’ was not defined and in general parlance redemption was essentially sale of mutual fund units by the unit holder back to the AMC

Accordingly, it was held that the Applicant was not eligible to avail ITC on inputs and input services used in relation to the subscription and redemption of mutual funds and was also required to reverse the ITC on common inputs and input services used in relation to the expenditure incurred for the said activity as per Section 17(2) of the CGST Act.