By TIOL News Service

MUMBAI, SEPT 11, 2014: NINE appeals involving a total amount of Service Tax demand of Rs.1179.86 lakhs have been decided by the Tribunal recently. And, to let the cat out of the bag - the appeals of the assessees have been allowed with consequential relief.

Brief facts

The appellants herein are lessors of immovable property. They have leased out their premises on long-time lease ranging from 5 to 10 years. For the services rendered they are receiving lease rentals on a monthly basis. In addition to these rentals, they are also taking interest free security deposits from the lessees. These security deposits vary from six months' rent to one year's rent. The security deposits are taken to secure default in payment of rentals, default in payment of utility charges, if any, and damage caused to the property other than the usual wear and tear. These deposits are returned to the lessee at the end of the lease period. The lease agreements also provide for increase in the lease rental once in three years by 15% of the rent agreed upon.

Case of Department

The department was of the view that the taking of interest free security deposit has suppressed the lease rentals and, therefore, notional interest @ 18% of the deposit should be added to the rent received and service tax should be demanded on the notional interest on the security deposit. Accordingly, show cause notices were issued and the demands totalling in excess of Rs.11 crores were confirmed.

Stay applications, fate thereof

We reported the decisions of the Tribunal on the stay applications as -

ST - Notional interest on security deposit taken for premises rented out on lease - whether to be considered as additional consideration for payment of ST - no evidence led by Revenue to show that such security deposit has influenced rent received and it is only a presumption - Pre deposit waived and stay granted: CESTAT - 2013-TIOL-1068-CESTAT-MUM

ST - Renting of Immovable Property Service - deposits received from tenants, whether includible in gross value while discharging ST - there is no evidence on record to show that the security deposit had influenced the rent received - in view of Stay order passed in case of Magarpatta Township Development & Construction Co. Ltd. - 2013-TIOL-1068-CESTAT-MUM pre deposit waived and stay granted - Stay petition allowed: CESTAT [ 2014-TIOL-978-CESTAT-MUM ]

Decision on Appeals

After hearing both sides, the CESTAT observed -

++ Section 67 of the Act clearly provides that only the consideration received in money for the service rendered is leviable to service tax. The consideration for renting of the immovable property is the amount agreed upon between the parties and on this amount the appellant is discharging service tax liability. The security deposit is taken for a different purpose altogether. It is to provide for a security in case of default in rent by the lessee or default in payment of utility charges or for damages, if any, cause to the leased property. Thus, the security deposit serves a different purpose altogether and it is not a consideration for leasing of the property. The consideration of the leasing of the property is the rent and, therefore, what can be levied to service tax is only the rent charged and no notional interest on the security deposit taken can be levied to tax. There is no provision in service tax law for deeming notional interest on security deposit taken as a consideration for leasing of the immovable property. Therefore, in the absence of a specific provision in law, as held by the apex court in the case of Moriroku UT India (P) Ltd. - 2008-TIOL-45-SC-CT, there is no scope for adding any notional interest to the value of taxable service rendered.

++ Even in the excise law, under Rule 6 of the Valuation Rules, unless the department shows that the deposit taken has influenced the sale price, notional interest cannot be automatically included in the sale price for the purpose of levy. In the absence of a provision in law providing for a notional addition to the value/price charged, the question of adding notional interest on the security deposit as a consideration received for the services rendered cannot be sustained and we hold accordingly.

Adverting to the decisions in J.K. Investors (Bombay) Ltd. & Intercontinental Consultants and Technocrafts Pvt. Ltd. 2012-TIOL-966-HC-DEL-ST & ISPL Industries Ltd. (2003-TIOL-98-SC-CX ), the Bench concluded -

++ There is not even an iota of evidence adduced by the Revenue to show that the security deposit taken has influenced the price i.e. the rent in any way. In the absence of such evidence, it is not possible to conclude that the notional interest on the security deposit would form part of the rent. We also do not find any reason for adopting a rate of 18% per annum as rate of interest, which is neither the bank rate of interest for deposits or loans or the market rate of interest. Adoption of such an arbitrary rate militates against the concept of valuation. In view of the foregoing, we hold that notional interest on interest free security deposit cannot be added to the rent agreed upon between the parties for the purpose of levy of service tax on renting of immovable property.

In fine, the appeals were allowed with consequential relief. 

(See 2014-TIOL-1728-CESTAT-MUM)