Whether notional interest on security deposit is to be added in lease rentals?

Case:-MURLI REALTORS PVT LTD VERSUS COMMISSIONER OF CENTRAL EXCISE PUNE-II

Citation:2014-TIOL-1728-CESTAT-MUM

Brief Facts: There are 9 appeals and 1 stay petition. The details of these appeals, the order-in-original from which they have arisen, the period of demand and the service tax demand confirmed are given in the table below:

S.No	Appeal No.	Appellant	Order-in-Original No. & Date	Period involved	Service Tax Demand confirmed (Rs.)
1	ST/86521/2013	Murli Realtors Pvt. Ltd.	PUN-EXCUS-003- COM-043-13-14 dated 14/02/2014	April 2008 to Mar 2013	63,34,710/-
2	ST/85382/2013	Magarpatta Township Developers & Construction Co. Ltd.	20/P- III/ST/COMMR/2012-13 dated 14/12/2012	June 2007 to January	3,26,12,102/-
			20/P- III/ST/COMMR/2012-13 dated 14/12/2012	2011	3,26,12,102/-
3	ST/86957/2014		PUN-EXCUS-003- COM-051-13-14 dated 29/03/2014	01/02/2011 to 30/09/2013	2,70,84,079/-
4	ST/89511/2013	Jain Construction	PUN-EXCUS-003- COM-009-13-14 dated 28/08/2013	01/06/2007 to 31/03/2012	1,00,61,050/-
5	ST/89898/2013	Sai Construction Pvt. Ltd.	PUN-EXCUS-003- COM-015-13-14 dated 30/09/2013	01/06/2007 to 31/03/2012	1,01,41,529/-
6	ST/85580/2014	India Land Infrastructure Development Pvt. Ltd.	PUN-EXCUS-003- COM-022-13-14 dated 18/11/2013;	01/06/2007 to 31/03/2012	99,67,789/-
		India Land Infrastructure Development Pvt. Ltd.		01/06/2007 to 31/03/2012	99,67,789/-
7	ST/86118/2014	RVS Hospitality & Development Pvt. Ltd.	PUN-EXCUS-003- COM-040-13-14 dated 22/01/2014;	04/01/2008 to 31/03/2013	79,60,263/-
		RVS Hospitality & Development Pvt. Ltd.	PUN-EXCUS-003- COM-040-13-14 dated 22/01/2014;	04/01/2008 to 31/03/2013	79,60,263/-
8	ST/86243/2014	Vansum Industries	PUN-EXCUS-003-COM-041-13-14 dated 28/01/2014;	June 2007 to March 2012	53,90,599/-
9	ST/85471/2014	The Manjri Stud Farm Pvt. Ltd	PUN-EXCUS-003- COM-021-13-14 dated 08/11/2013	2007-08 to 2011-12	84,37,792/-

As all these appeals involve a common issue, they are taken up together for consideration and disposal.
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. 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 were confirmed. Aggrieved of the same the appellants are before Tribunal.
While in respect of 8 cases, the appeals are listed for final hearing, in respect of one case, both stay petition and appeal are listed. Since the appeal is listed for final hearing, stay is granted and pre-deposit is waived.

Appellant Contention: The learned counsels for the appellants, led by Shri Badrinarayanan, appearing for the appellant, M/s. Magarpatta Township Developers & Construction Co. Ltd., assisted by others made the following submissions.

As per the industry practice, the lessees have agreed to give an interest free deposit to the appellant. These deposits are taken to safeguard the interest of the lessor in the event of default by the lessee. The said security deposit is refundable on the expiry or on the termination of the agreement. The purpose of security deposit is to deduct/recover from the lessee in case the lessee defaults rent payment or causes damage to the assets. He further submits that the service tax is a transaction based tax and the value liable to service tax would be the consideration received by the service provider under the contract. Section 67 of the Finance Act, 1994 provides for the measure of levy. The said section reads as follows:
"(1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall -

in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;
in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner."

Section 67 provides that taxable value is the consideration whether in monetary or non-monetary form. Therefore, if any benefit accrues to either party which is not in the nature of consideration agreed upon by the parties, the same is not liable to be added to the value of service in terms of Section 67. Further, there is no deeming provision for increasing the value of consideration either in Section 67 or in the Service Tax (Determination of Value) Rules, 2006 framed thereunder.
4.2 The hon'ble apex Court in the case of Moriroku UT India (P) Ltd. vs. State of UP 2008 (224) ELT 365 (SC) = 2008-TIOL-45-SC-CT considered a question whether the amortised cost of moulds supplied free of cost by the buyer to the dealer-cum-manufacturer was addable to the consideration charged for the purpose of levy of sales tax. The hon'ble apex Court held that, unlike Central Excise duty which is concerned with intrinsic value of excisable goods, sales tax law was not concerned with intrinsic value but with the consideration paid for the goods and accordingly it was held that the amortised cost of the moulds will not form part of the value for the purpose of levy of sales tax. The ratio of the above decision would apply to the facts of the present case. The price which is the amount of consideration for the service of renting of immovable property is the rent. There is no deeming fiction or notional concept and in the absence of such a deeming fiction, only the amounts agreed to as lease rent are taxable and notional interest cannot be added to the value of the service for the purpose of levy of service tax.
The CBEC vide Circular No. 65/14/2003-ST dated 05/11/2003 had clarified as follows:

'2. Thus if a service provided is taxable, tax has to be paid on its value. Section 67 also clarifies value of service as the amount charged for the taxable service by the service provider. In other words, an amount becomes value of taxable service only when it has a nexus with the service provided. That is the reason why the expression used in rule 6 is value of taxable services and not amount. The implication is that the tax has to be paid on the value of taxable services attributable to the service provided in a month/quarter as and when it is received....'

In the present case, the entire transaction is in monetary form and no part of the consideration is received in non-monetary form. Thus, the gross amount charged only will be the value of taxable service in terms of Section 67 of the Finance Act, 1994. The security deposit is received towards recovery of damages, if any, caused to the leased property by the lessee and it is not towards for the provision of any taxable service. The learned counsel also placed reliance on Australian Goods and Service Tax Ruling (GSTR) 2001/6 which deals with non-monetary consideration wherein it has been clarified by way of an example:

"96. For example, if a tenant did not have an actual or implied obligation under a lease to keep the leased premises in good repair, it is likely that the landlord would require the tenant to make higher lease payments. However, if the tenant agrees to such an obligation, it is not consideration for the supply of the premises as it is not provided as compensation or value for the supply of the premises."

He also relies on the decision of the hon'ble Bombay High Court in the case of Commissioner of Income Tax vs. J.K. Investors (Bombay) Ltd. 248 ITR 723 (Bom.). The issue before the hon'ble High Court was whether the notional interest on security deposit should be considered for the purpose of calculation of actual rent and it was held by the hon'ble High Court that notional rent will not be taken into consideration.

Similarly in Maharashtra Stamp Act, 1958 vide Section 36A(b)(iii) there is a specific provision introduced w.e.f. 2013 which explicitly provides that, for the purpose of payment of stamp duty on leave and licence agreement, notional interest @10% of the security deposit will also be considered. However, there is no such provision in the Finance Act, 1994, and therefore, the department cannot add notional value under Section 67 to arrive at the value of the taxable service provided by the appellant.
He further contends that it is for the department to show that the rent has been influenced by the security deposit. In the absence of any iota of evidence led by the department in this regard, value of notional interest cannot be added to the value of taxable service. Rule 6 of the Central Excise Valuation Rules also deals with a similar situation, in case, advance was taken for supply of goods. Explanation 2 thereof states that

"Where an assessee receives any advance payment from the buyer against delivery of any excisable goods, no notional interest on such advance shall be added to the value unless the Central Excise Officer has evidence to the effect that the advance received has influenced the fixation of the price of the goods by way of charging a lesser price from or by offering a special discount to the buyer who has made the advance deposit."

A similar question arose for consideration by the apex Court in VST Industries Ltd. vs. Commissioner of Central Excise, Hyderabad 1998 (97) ELT 395 (SC)= 2002-TIOL-140-SC Ex wherein the Court ruled that interest received when goods are sold on credit does not form part of price on which excise duty is payable, since all buyers are charged a uniform price irrespective of the fact that whether the buyer was buying goods on credit or cash. Reliance is also placed on the decision of the apex Court in the case of Commissioner of Central Excise, Mumbai -III vs. ISPL Industries Ltd. 2003 (154) ELT 3 (SC)= 2003-TIOL-98-SC-CX wherein also a question arose and the apex Court held that since the department did not produce any evidence to show nexus between the deposit taken and the price of the product and, therefore, the same is not includable in the assessable value.
It is accordingly, it is submitted that in the absence of specific provision in law and in the absence of any evidence led by Revenue to show that the security deposit taken has suppressed the rent, the impugned demands are not sustainable.

He further submits that extended period of time has been invoked for confirmation of demand. The issue involved in the present case is one of interpretation of statutory provisions. It is a settled position that in such matters, the question of invocation of extended period of time would not arise and also question of imposition of penalty would also not arise. Accordingly, he pleads for allowing the appeals.

Respondent Contention: The learned Additional Commissioner (AR) appearing for the Revenue reiterates the findings of the adjudicating authority. He also points out that there are provisions in Maharashtra Stamp Act, 1958 which provides for calculation of stamp duty, notional interest @10% per annum on refundable security deposit in respect of registration of lease/leave and licence agreement. Therefore, similar provisions can be read into Finance Act, 1994 to enhance the value. He also submits that since the security deposit is taken invariably in all cases and it is a general practice that wherever the quantum of deposit is higher the rent charged is less and vice-versa, there is a nexus between security deposit taken and the rent charged. Therefore, he pleads for upholding the impugned order.

Reasoning of Judgment:CESTAT considered submission from both side and pursued the record and find that Section 67 of the Act, reproduced above, 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 hon'ble apex Court in the case of Moriroku UT India (P) Ltd. (supra), 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.
In the J.K. Investors (Bombay) Ltd. case (supra), an identical question arose in respect of income from house property, whether notional interest on the security deposit taken could be added to arrive at the fair rent of the property and the hon'ble Bombay High Court held that value of notional advantage, like notional interest, will not form part of actual rent received as contemplated by Section 23(1)(b) of the Income Tax Act. Similarly in Intercontinental Consultants and Technocrafts Pvt. Ltd. vs. Union of India & Anr.= 2012-TIOL-966-HC-DEL-ST a question arose as to what is the scope of 67 of the Finance Act, 1994 and whether by way of rules it can be provided in law for inclusion of the expenditure or cost incurred by the service provider in the course of providing the taxable service. The hon'ble High Court held that as Section 67 authorises the determination of the value of the taxable service as the gross amount charged by the service provider in a case where the consideration for the service is money, it is only the value of such service that can be brought under service tax and nothing more and the quantification of the value of service can, therefore, never exceed the gross amount charged by the service provider for the service provided by him. The hon'ble apex Court in the case if ISPL Industries Ltd. (supra) also considered a similar question and held as follows:

"11. 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. There may be different reasons for taking advances, as indicated above in the earlier part of this judgment. Learned Counsel for the appellant submits that all that the revenue has to show is that interest free advance has been made by the buyer to the manufacturer which would lead to a presumption that it is to the advantage of the manufacturer having influenced the fixation of price as well. We, however, fail to appreciate the submission made on behalf of the revenue for drawing a presumption that fixation of price is influenced by such an advance. In this connection, we may refer to the Board's circular of 1998 quoted earlier, clause (iii) of which clearly provides that if there is no deference in the selling price for both categories of the wholesale buyers and there is also "no proof" that on account of advance deposits taken from some buyers, the price charged from all buyers has been reduced, then element of notional interest on advance deposits, cannot be added. Obviously, where there are two prices, one for those who have made the advance and the other who have not, it would require no further proof of the lower price having been influenced by the interest free advance made by the buyer. But otherwise, it would require proof and the proof for the purposes of holding that interest free advance has influenced the price would obviously be provided by the revenue. There is no scope for any such presumption as canvassed on behalf of the appellant. We find the same position to be continued in the later amendment in the Rules of 2003 referred to above. As in illustration 2, it talks of evidence to show that interest free advance has resulted in lowering of the prices. 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.

12. In the appeals before us, neither there is any evidence or proof on the record nor it is the case of the appellant on facts, that the interest free advance has influenced the price and the price lower than the normal price had been charged by the respondents. We do not think it necessary to deal with facts of each case separately since it is not in dispute that interest free advances were made by the buyers but at the same time it is also not in dispute that such advances had never influenced the price charged by the manufacturers from buyers."

In the case before Tribunal, 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.

Accordingly, we allow these appeals with consequential relief if any, in accordance with law. The stay petition is also disposed of.

Decision:- Appeals allowed.

Comment:- The essence of this case is that the notional interest on security deposit obtained by the lessor of property will not be added to the lease rentals for the purpose of levying service tax unless and until it is evidenced that the security deposit has influenced the lease rentals thereby leading to short payment of service tax.

Prepared by:- Hushen Ganodwala

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PJ/Case Law/2014-15/2396

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