By TIOL News Service

MUMBAI, JULY 15, 2013: NOTHING captivates the departmental officers more than the ‘security deposits' taken by a manufacturer. On the Central Excise side, the range officers were passionate in issuing periodical demand notices to assessees for the security deposits and advances taken by the manufacturers from their customers. The department logic is/was that these advances influence the final price of the manufactured goods inasmuch as because of this ‘advance' the assessee might have suppressed the value of the goods on which he would pay CE duty.

For computing this alleged "additional consideration', the SCNs alleged that had this advance amount been taken from the bank, the assessee would have required to pay interest thereon @18% and hence this factor is the additional consideration which is the component of undervaluation and on which the differential Central Excise duty is required to be paid. While doing all this and more the apex Court decisions in Metal Box India Ltd. - (2002-TIOL-108-SC-CX) and VST Industries Ltd. v. Collector - (2002-TIOL-140-SC-CX) was the cynosure of all eyes.

Fortunately, the apex Court decision in I.S.P.L Industries - ( 2003-TIOL-98-SC-CX) settled the issue once and for all, at least on the Central Excise side.

The Supreme Court had observed -

+ It is clear that the mere fact of making an interest free advance by a buyer to the manufacturer, by itself will not be a sufficient ground to reload the assessable value with notional interest. It would be necessary for the revenue to show that such advance has influenced in the lowering of the price and that it is not depicting the normal price of the goods.

+ The departmental circulars and the amendments in the Rules at the relevant time and subsequently too, do not envisage of any presumption to be drawn by mere fact of interest free advance by the buyer to the manufacturer. It requires proof and evidence to show that fixation of price has been influenced on the lower side by such a transaction of interest free advance

After an affair gone sour with the Central Excise assessees on the subject matter, the departmental officers have trained their eyes on the "security deposits" taken by service tax assessees.

The case: The appellant is a service provider engaged in various services including renting of immovable property of commercial construction undertaken by them. The appellant has been discharging service tax liability on the rent received from the lessees. The appellant has also taken security deposit from the lessees.

The department took a fancy to this "security deposit" and was of the view that notional interest on the security deposit is also a consideration for the renting of the immovable property and, therefore, service tax liability should be discharged on the notional interest @18% per annum on the security deposit collected by the appellant. Accordingly, a service tax demand of Rs.3,26,12,102/- was made on the appellant for the period 01/06/2007 to 31/01/2011 along with interest thereon and proposing to impose penalty vide notice dated 21/10/2011.

The CCE, Pune-III did the needful and, therefore, the appellant is before the CESTAT.

It is submitted - that they have taken security deposit from the lessees for the damages, if any, caused to the furniture and fittings supplied along with the premises or any damage done to the properties. The security deposit has no nexus either with the area of the property rented out. It is charged as six months rent and, therefore, it cannot be said that the notional interest has influenced the consideration received for the services rendered. Reliance is placed on the Supreme Court decision in CCE, Mumbai-III vs. ISPL Industries Ltd. - (2003-TIOL-98-SC-CX) wherein in respect of Central Excise valuation the Apex Court held that notional interest on the advances taken by the assessee, from the buyers cannot be added to the assessable value of the goods cleared, unless there is evidence to show that the interest free deposit taken has influenced the price is on the revenue. It is further submitted that there is no evidence led by the revenue to prove that the security deposit taken has influenced the rent for the property leased out and it is only a mere presumption on the part of the revenue. Accordingly, the appellant pleaded for grant of stay in the matter.

The Revenue representative reiterated the findings of the adjudicating authority.

The Bench observed -

"5.1 The practice of taking security deposit for the premises rented out on lease basis is common throughout the country and the amount of security deposit taken also varies from place to place and also depends on the property, whether it is for commercial or residential purpose. There is a general practice prevalent throughout the country. In the present case also, the appellant has followed this practice. There is no evidence available on record led by the revenue to show that the notional interest on the interest free security deposit has influenced the consideration received for renting and it is only a presumption on the part of the revenue. Therefore, the ratio of the apex Court decision in the case of ISPL Industries Ltd. case (cited supra) would apply. Accordingly, we are, prima facie, of the view that the appellant has made out a case in their favour for grant of stay. Accordingly, we grant unconditional waiver from pre-deposit of dues adjudged against the appellant and stay recovery thereof during the pendency of the appeal."

More in the days to come…

(See 2013-TIOL-1068-CESTAT-MUM)