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PJ/CASE LAW/2015-16/2740

Whether assessee is liable to pay service tax on the Notional Interest on the Security Deposit collected?

Case:-MAGARPATTA TOWNSHIP DEV. & CONST. CO. LTD. VsCOMMR. OF C. EX., PUNE-III

Citation:-2014 (33) S.T.R. 53 (Tri. - Mumbai)

Brief Facts:-The appeal and stay application are directed against Order-in-Original No. 20/P-III/ST/COMMR/ 2012-13, dated 14-12-2012 passed by the Commissioner of Central Excise & Service Tax, Pune.
The appellant, M/s. Magarpatta Township Development & Construction Co. Ltd. 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 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 1-6-2007 to 31-1-2011 along with interest thereon and proposing to impose penalty vide notice dated 21-10-2011. The notice was adjudicated vide the impugned order and the demands were confirmed along interest thereon and equivalent amount of penalty was also imposed on the appellant. Hence, the appellant is before Tribunal.

Appellant contentions:- The ld. Counsel for the appellant submits 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. He relies on the decision of the Hon’ble Apex Court in the case of CCE, Mumbai-III v. ISPL Industries Ltd. - 2003 (154) E.L.T. 3 (S.C.) wherein in respect of Central Excise valuation the Hon’ble 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 and the burden to prove that the interest free advance has influenced the price is on the revenue. He submits the ratio of the decision would apply to the facts of the present case. 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, he pleads for grant of stay.

Respondent contentions:-The ld. Additional Commissioner (AR) appearing for the Revenue reiterates the findings of the adjudicating authority.

Reasoning of Judgment:-We have carefully considered the submissions made by both the sides.
The practice of taking security deposit for the premises rented out on lease basis is common through out 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. This is a general practice prevalent through out 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. (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.

Decision:-Stay granted. 

Comment:-The essence of the case is that service tax is not leviable on the notional interest on security deposit taken for compensating the damage caused to the property. The service tax is payable on the notional interest of security deposit only if such security deposit has influenced the consideration received for renting. As in the present case, nothing was proved that the security deposit has in any manner influenced the rent, the appeal was allowed following the decision of the Apex Court in the case of ISPL Industries Ltd.

Prepared By: Meet Jain

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