CESTAT Bangalore Quashes Service Tax Demands on Mutual Fund Investments and Employee Notice Pay Recoveries
The Bangalore Regional Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has delivered a pivotal ruling regarding the applicability of Service Tax on corporate investments in mutual funds and the recovery of notice period pay from departing employees. In the matter of Instakart Services Pvt. Ltd. Vs Commissioner of Central Tax (CESTAT Bangalore), the Tribunal evaluated whether investing surplus funds constitutes an exempted service warranting the reversal of CENVAT credit, and whether retaining amounts from employees for unserved notice periods qualifies as a taxable service.
Through Final Order No. 20415/2024 dated 13.03.2024, the Tribunal set aside the earlier Order-in-Original No. 16/ST/COMMR/2018 dated 26.12.2018, ruling in favor of the assessee on both counts. This comprehensive analysis explores the factual background, the legal arguments presented by both sides, and the established judicial precedents that guided the Tribunal's final determination.
Factual Matrix of the Dispute
The assessee, M/s. Instakart Services Pvt. Ltd., was engaged in providing various taxable services while also receiving certain services. In the regular course of its business operations, the assessee availed CENVAT credit on input services and utilized this credit to discharge its output Service Tax liabilities.
During a departmental audit of the assessee's financial records, the Revenue authorities raised two distinct objections:
- Mutual Fund Investments: The audit team observed that between July 2015 and September 2016, the assessee had parked surplus funds in mutual funds. The Department characterized this activity as "trading in Mutual Funds," classifying it as an exempted service. Consequently, the Revenue alleged that the assessee was required to reverse 6% or 7% of the value of these transactions under
Rule 6(3)of theCENVAT Credit Rules, 2004, as common input services were allegedly used for both taxable and exempted activities without maintaining separate accounts. - Notice Period Recoveries: The audit further noted that between December 2015 and September 2016, the assessee had recovered certain amounts from employees who resigned and left the organization without serving their mandatory contractual notice period. The Department construed these recoveries as consideration for a taxable service—specifically, the service of tolerating an act or waiving a contractual obligation.
Based on these observations, a show-cause notice was issued to the assessee. The notice proposed a demand of Rs. 7,75,11,889/- representing the 6%/7% value attributed to the mutual fund transactions, and a separate demand of Rs. 7,84,641/- representing the Service Tax allegedly payable on the notice period waiver charges. These demands were accompanied by proposals for applicable interest and penalties. The adjudicating authority subsequently confirmed these demands in the Order-in-Original, prompting the assessee to file Service Tax Appeal No. 21017 of 2019 before the CESTAT.