ITC Reversal Required for Mutual Fund Investments as Securities Are Exempt Supply | AAAR

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ITC reversal for mutual fund investments

Case Details: Zydus Lifesciences Ltd., In re - [2025] 180 taxmann.com 233 (AAAR-GUJARAT)

Judiciary and Counsel Details

  • Rajeev Topno & Sunil Kumar Mall, Member
  • Jigar Shah, Ms Priyanka Kalwani & Ms Devanshi Sharma, Advs. for the Appellant.
  • J.A. Pande, Assistant Commissioner for the Respondent.

Facts of the Case

The applicant is a pharmaceutical manufacturer that invests surplus funds by subscribing to and redeeming mutual fund units. It claimed ITC on common inputs and input services which were used not only in its taxable business operations, but also for its mutual fund investment and redemption activities, and sought an advance ruling that no proportionate reversal of ITC was required. It is contended that mutual fund units, being ‘securities’, are neither goods nor services and the redemption is not a ‘sale’ but merely an extinguishment of rights, so the valuation mechanism could not apply. The matter was placed before the Appellate Authority for Advance Ruling, Gujarat (AAAR).

AAAR Held

The AAAR held that the applicant must reverse the proportionate ITC attributable to its mutual fund subscription and redemption activities under Section 17(2) of the CGST Act, because it explicitly includes ‘transactions in securities’ in the value of exempt supply, and Rule 42 provides a valid mechanism for apportionment. The AAAR found that redemption of mutual fund units is commercially and legally equivalent to a sale to the asset management company. It rejected the applicant’s argument that the machinery provision is inapplicable, noting that the ‘sale value’ mechanism set out under Rule 42 is legitimate and concluded that the claim to avoid ITC reversal in respect of securities is not tenable in law.

List of Cases Reviewed

  • CIT v. B.C. Srinivasa Setty [1981] 5 Taxman 1/128 ITR 294 (SC)
  • Shabhia Abraham [2015] 61 taxmann.com 95 (SC)/[2015] 52 GST 30 (SC)/[2015] 322 ELT 372 (SC)/[2015] 83 VST 450 (SC)/[2015] 34 GSTR 146 (SC)
  • Pushpam Forgings 2002 (149) ELT 490 Tri
  • Suresh Kumar Bansal 2017 (4) GSTL J 128 SC
  • Siegwerk India Pvt. Ltd. v. Commissioner, Central Goods & Service Tax, Commissionerate 2024 (10) TMI 220 (CESTAT New Delhi)
  • Instakart Services Pvt. Ltd. v. Commissioner of Central Tax 2024 (3) TMI 1350 (CESTAT Bengalore)
  • Ambuja Cements Ltd. v. Commissioner of Customs, Central Excise & GST 2023 (5) TMI 806 (CESTAT Mumbai)
  • Ace Creative Learning Pvt. Ltd. v. Commissioner of Central Tax [2021] 126 taxmann.com 215 (Bangalore – CESTAT)/2021 (4) TMI 687
  • CESTAT Bangalore, M/s GMR Hyderabad Air Cargo and Logistics Pvt Ltd v. Commissioner of Central Tax Rangareddy – GST And Commissioner of Central Tax 2025 (5) TMI 156 (CESTAT Hyderabad) (para 21) distinguished
  • Zydus Lifesciences Ltd., In re [2025] 173 taxmann.com 761/98 GSTL 222 (AAR – GUJARAT) (para 22) affirmed

List of Cases Referred to

  • Shabina Abraham v. CCE & Customs [2015] 61 taxmann.com 95/52 GST 30 (SC) (para 8)
  • CCE & Customs v. Larsen & Toubro Ltd. [2015] 60 taxmann.com 354/52 GST 1 (SC) (para 8)
  • CST v. Bhayana Builders (P.) Ltd. [2018] 91 taxmann.com 109/66 GST 320/10 GSTL 118 (SC) (para 8)
  • Gypsy Pegasus Ltd. v. State of Gujarat 2018 (15) GSTL 305 (SC) (para 8)
  • Munjaal Manishbhai Bhatt v. Union of India [2022] 138 taxmann.com 117/92 GST 327/62 GSTL 262 (Gujarat) (para 8)
  • Union of India v. Mohit Minerals (P.) Ltd. [2022] 138 taxmann.com 331/92 GST 101/61 GSTL 257 (SC) (para 8)
  • SAL Steel Ltd. v. Union of India [2020] 117 taxmann.com 619/37 GSTL 3 (Gujarat) (para 8)
  • Suresh Kumar Bansal v. Union of India [2016] 70 taxmann.com 55/56 GST 90 (Delhi) (para 8)
  • Cognizant Technology Solutions India Private Limited v. Commissioner of GST & Central Excise 2024 (9) TMI 922 (Tri Chennai) (para 8)
  • Siegwerk India Pvt. Ltd. v. Commissioner, Central GST, Commissionerate 2024 (10) TMI 220 (CESTAT New Delhi) (para 8)
  • Ponni Sugars Erode Ltd. v. Commissioner of GST & Central Excise 2024 (5) TMI 3 (CESTAT Chennai) (para 8)
  • Instakart Services Pvt. Ltd. v. Commissioner of Central Tax 2024 (3) TMI 1350 (CESTAT Bengalore) (para 8)
  • Ambuja Cements Ltd. v. Commissioner of Customs, Central Excise & GST 2023 (5) TMI 806 (CESTAT Mumbai) (para 8)
  • Ace Creative Learning Pvt. Ltd. v. Commissioner of Central Tax [2021] 126 taxmann.com 215 (Bangalore – CESTAT) (para 8)
  • Siegwerk India Pvt. Ltd. v. Commissioner of CGST 2025 (3) TMI 1066 (CESTAT New Delhi) (para 8)
  • Career Point Limited v. Commissioner of Central GST, Excise and Customs 2025 (5) TMI 487 (CESTAT New Delhi) (para 8)
  • GMR Hyderabad Air Cargo and Logistics Pvt Ltd. v. Commissioner of Central Tax Rangareddy – GST And Commissioner of Central Tax 2025 (5) TMI 156 (CESTAT Hyderabad) (para 8)
  • CIT v. B.C. Srinivasa Setty [1981] 5 Taxman 1/128 ITR 294 (SC) (para 8)
  • State of Punjab v. Pyare Lal Malhotra AIR 1976 SC 800 (para 9).

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Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied