Whether service tax is leviable on refundable security deposits?

PJ/CASE LAW/2014-15/2547

Case:- SAMIR RAJENDRA SHAH VERSUS COMMISSIONER OF CENTRAL EXCISE, KOLHAPUR

Citation:- 2015 (37) S.T.R. 154 (Tri. - Mumbai)

Brief facts:- Brief facts of the case are that the appellant is owner of immovable property and the same was given on rent to various parties. As per the agreement entered between the lessee and the owner, the lessee has to pay some amount towards security deposit and monthly rent on the agreed terms. There was a clause in the agreement that the Service Tax shall be borne by the lessee. In these set of facts, demand of Service Tax was confirmed against the appellant on the total amount i.e. security deposit and rent received by the appellant from lessee during the period 1-6-2007 to 31-3-2012. During adjudication, the appellant pleaded that they should be given the benefit of Section 80(2) of the Finance Act, 1994 as they have paid the entire amount of Service Tax prior to 28-11-2012, therefore, penalties cannot be imposed. Adjudication took place and Service Tax was demanded on whole of the amount of security deposit and rent received from the lessee by the appellant and benefit of Section 80(2) was not given to the appellant. Aggrieved by the said order, the appellant is before the tribunal.

Appellant’s contention:- The learned Counsel appearing on behalf of the appellant submits that no Service Tax is payable on the security deposit received by the appellant from the lessee as the said amount is refundable at the time of termination of lease/rent agreement of the property.

Therefore, the same does not form a part of services provided by the appellant. It is further submitted that the appellant was under bonafide belief that the Service Tax on renting of immovable property is not payable by them as the dispute, whether on renting of immovable property the service is taxable, is still pending before the Hon’ble Apex Court.

Therefore, they have not collected the Service Tax from the lessee. In these circumstances, the amount collected by the appellant as rent may be treated as cum-Service Tax amount. If this is to be taken into consideration then they have paid the whole of the Service Tax before 28-11-2012 therefore, they are entitled for the benefit of Section 80(2) of the Finance Act, 1994. In these circumstances, he prays that the impugned order is required to be set aside.

Respondent’s contention:- On the other hand, the learned A.R. submits that as per the agreement, the Service Tax is to be paid separately. In these circumstances, the amount paid by the appellant has not to be considered as cum-Service Tax. Therefore, on that component, the appellant is required to pay Service Tax. As the appellant has not paid full Service Tax, therefore, they are not entitled for the benefit of Section 80(2) of the Finance Act, 1994.

Reasoning of judgment:- After hearing both the sides, the adjudicating authority told that the appellant had contested only the quantum of Service Tax but not the levy of Service Tax. Therefore, they had to consider the issue of quantum of tax on which the appellant had to pay the Service Tax. Admittedly, the security deposit collected by the appellant is refundable at the time of termination of lease/rent agreement. Therefore, the said security deposit cannot form a part of service provided by the appellant. Therefore, on the said amount, Service Tax is not payable. They had also examined the copy of the agreement produced before them by the appellant. As per the agreement, the Service Tax is payable separately by the lessee. As the appellant had not recovered Service Tax from the lessee, they may recover separately. Therefore, the contention of the appellant as they have not recovered the Service Tax from the lessee, the rent recovered by them be treated as cum-Service Tax is not acceptable. In those circumstances, they hold that the rent received by the appellant should be treated as gross value of taxable service and on the said amount the appellant is required to pay Service Tax.
The adjudicating authority had further found that on the understanding of the appellant that what amount of rent they received the same is treatable as cum-Service Tax, therefore, they have not paid full amount of Service Tax. That understanding by the appellant is not acceptable. In those circumstances, substantial benefit of Section 80(2) cannot be denied. In these circumstances, they hold that the appellant is entitled for the benefit of dropping the penalty on the appeal as per Section 80(2) of the Finance Act, 1994.
With these terms, they hold as under:-

(a) On Security Deposit no Service Tax is payable.

(b) Rent received by the appellant shall be treated as the value of taxable service and Service Tax is payable separately.

(c) No penalty is leviable on the appellant.

Appeal is disposed of in the above terms.

Decision:- Appeal disposed off.

Comment:- The essence of the case is that the security deposit collected by the owner of the property is refundable at the time of termination of lease/rent agreement. Therefore, the said security deposit cannot form a part of service provided by the owner himself. Hence, service tax is not payable on the said amount.

Prepared by: Kushal Shah

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PJ/CASE LAW/2014-15/2547

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