The Appellate Authority for Advance Ruling of Gujarat (AAAR) held that the delegated legislation cannot render the intent of the statute otiose, and therefore, directed the global healthcare provider (Appellant) to reverse the input tax credit (ITC) on common inputs and input services used in relation to subscription and redemption of mutual funds.
The Division Bench comprising Rajeev Topno (Member) and Sunil Kumar Mall (Member) observed that the legislature’s intent is clearly manifested in the statute in Section 17(3) of the CGST Act, which proposes inclusion of the value of transactions in securities [in this case mutual funds] for computing exempt supply u/s 17(2) of the CGST Act. Thus, accepting the argument of the appellant that since ‘redemption’ of mutual fund is not akin to ‘sale’ there is no mechanism for reversal of common inputs and input service in case of redemption, would lead to a situation wherein the delegated legislation [i.e. CGST Rules, 2017] has rendered the intent of the statute [i.e. CGST Act, 2017], otiose.
The Bench explained that the phraseology used in Section 17(3) of the CGST Act, 2017 is “transactions in securities” and, hence, the term ‘sale’ used in the expression “the value of security shall be taken as 1% of the sale value of such security” of the CGST Rules, 2017 has to be interpreted accordingly, to ensure that the provisions of Section 17(3) of the CGST Act, 2017 are not rendered otiose.
The Bench found that the Appellant has not justified how the activity of subscription and redemption of mutual funds is in the course of furtherance of business when it is his own say that they are engaged in the manufacture, supply, and distribution of pharmaceutical products.
The Bench also clarified that even if the subscription and redemption of mutual funds are in the course of furtherance of business, the ITC used in relation to these activities is subject to the condition mentioned in section 17(2) of the CGST Act, 2017, read with Section 17(3).
Briefly, in this case, the Appellant, a leading Indian Pharmaceutical company, receives ITC in respect of inputs/input services, which are used for taxable supplies as well as towards the activity of investment and redemption of mutual fund units. As per their practice, they are reversing the proportionate ITC in terms of section 17(2) of the CGST Act, 2017, read with Rule 42(2) of the CGST Rules, 2017, treating the activity of investment and redemption of mutual fund units as an ‘exempt supply’.
The Appellant therefore approached the AAR seeking a ruling on their eligibility to avail ITC of tax paid on common inputs and input services used in relation to the subscription and redemption of mutual funds, which was answered in affirmation, subject to condition mentioned in s.17(2); that the value of exempt supply in terms of section 17(3) shall include the value of transactions in securities.
Appearances:
Advocates Jigar Shah, Priyanka Kalwani, and Devanshi Sharma, for the Appellant
Assistant Commissioner, SGST, J A Pande, for the Respondent/ Revenue
