Whether interest free refundable security deposit for leasing property leviable to ST?

Case study

Prepared by: CA Neetu Sukhwani &
Sharad Bang

Introduction:- M/s Girnar Hotels Pvt. Ltd., hereinafter referred to as the assessee are engaged in providing services namely “Renting of Immovable Property”. They entered into an agreement with M/s. Reliance Retails Ltd. for giving on lease multistoried mall and multiplex, namely “Ashapurna Mall” at Jodhpur. The terms of the lease deed stated that the lessee shall provide the lessor, by way of interest free refundable security deposit, an amount of Rs.1,21,50,000 which was equal to 6 month’s rent. Consequently, it was alleged that the rent had been reduced to adjust the benefits accruing out of the deposits. Hence, the assessee was called upon to pay service tax amounting to Rs.6,62,039/- as interest earned on the amount of security deposit calculated at the rate of 13%. The assessee contended that the interest free security deposit had been obtained on account of trade parlance and the same was not leviable to service tax as it was for compensating the lessor for any damage to the property on account of leasing. The outcome of the show cause notice issued in this regard is the subject matter of present case study.

M/s Girnar Hotels Pvt. Ltd.[OIO 08-10/ST/JDR/2015 Dated 10.03.2015]

Relevant legal provisions

Sections 65, 67, 68, 69 & 73 of the Finance Act, 1994

Rule 7 of the Service Tax Rules, 1994

Section 76 & Section 78 of the Finance Act, 1994.

Issue Involved:

Whether interest free refundable security deposit for leasing property leviable to ST?

Brief facts:-The assessee, M/s Girnar Hotels Pvt. Ltd. were providing the services of Renting of Immovable Property and Maintenance and Repair services under the sub clause (90a) of the Section 65 and registered with Central Excise Department under the provision of section 69 of the Finance Act, 1994.
They entered into an agreement with M/s. Reliance Retails Ltd. for giving on lease a multistoried mall and multiplex, namely “Ashapurna Mall” at Jodhpur. In the said lease deed, it was declared that the lease rent shall be amounting to Rs.20,25,000 per month. The terms of the lease deed stated that the lessee shall provide the lessor, by way of interest free refundable security deposit, an amount of Rs.1,21,50,000 which was equal to 6 month’s rent. The said amount of security deposit was paid by the lessor in three installments:

·         Rs. 11,00,000 on 14.11.2006
·         Rs. 47,03,000 on 28.12.2006
·         Rs. 63,47,000 on 10.09.2007

Thereafter, it was alleged by the department, that the rent had been reduced to adjust the benefits accruing out of the deposits. Hence, the assessee was called upon to pay service tax amounting to Rs.6,62,039/- on the amount of interest earned on the security deposit calculated at the rate of 13%.

The assessee, vide their letter dated 07.12.2010, submitted that the security deposit was not a part of the rent. It was taken by them for repair of the rented property in case any damage is caused to the property by the tenant. Ignoring the contention submitted by the assessee, a show cause notice was issued to explain as to why:-

(i)                 Service tax amounting to Rs. 662039/- (including cess) should not be recovered from them under Section 73 of the Finance Act, 1994.
(ii)                Interest should not be recovered from them under Section 75 of the Act ibid.
(iii)                Penalty should not be imposed upon them in terms of the provisions of Section 76 of the Finance Act, 1994 for contravention of Section 67 of the Act read with Rule 1 of Rule 5 of the Service Tax (Determination of Value) Rules, 2006.
(iv)                Penalty should not be imposed upon them under Section 77 of the Finance Act, 1994 for not showing the full details in the ST-3 returns contravening the provision of Rule 7 of the Service Tax Rules, 1994 read with Section 70 of the Finance Act, 1994.
(v)                 Penalty should not be imposed upon them under provision of section 78 of the Finance Act, 1994 for suppression of the facts/intentional evasion of service tax amounting to Rs. 662039/- (Inc. Cess).

Assessee’s contention:-The assessee in its reply to the show cause notice put forward the following contentions. It was submitted that the impugned show cause notice issued to them was wholly and totally erroneous and was liable to be set aside.

It was submitted that the impugned show cause notice was contending that they did not pay service tax on the security deposit received by them from M/s Reliance Mart and others. They had given the building on rent to them. The security deposit was equivalent to six month’s rent as per their first and second contract respectively. It was contended in the show cause notice that the additional consideration arising out of the security deposit was supposed to be included in the taxable value of renting of immovable property. In this regard it was submitted that as wrongly alleged in the impugned show cause notice, security deposit was not a part of rent and therefore, no service tax was payable on the same. The said deposit was taken by them for repair of the rented property in case any damage was caused by the tenant to the property. Further the rent was not reduced to adjust the benefits from the deposit. Moreover, the amount was kept in a current account and no interest was being incurred by them on the same. Thus, it was submitted that there was no service tax liability on the security deposit collected by them from their tenant. Hence the show cause notice was not tenable and liable to be set aside.

They further submitted that it was the liability of the department to establish a nexus between the security deposit and the amount of rent, without which service tax cannot be levied on the same. It had been held by the highest Court of India that burden was on the Revenue to prove that interest free advance has influenced the price. It had been held in the case of CCE, Tamil Nadu Vs M/s Southern Structural Ltd [2008-TIOL-154-SC-CX]as follows:-

“Burden was on Revenue to prove that interest-free advance has influenced the price:since the fact regarding advances received was already in the knowledge of the Department and the earlier similar proceedings initiated by the Department were dropped by the Assistant Commissioner, the Revenue was not justified in invoking the extended period of limitation.

If there was no difference in the selling price for both categories of the wholesale buyers and there was also 'no proof' that on account of advance deposits taken from some buyers, the price charged from all buyers has been reduced, then the 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 was no scope for any such presumption: SUPREME COURT;

As such, burden to prove that the rent had been influenced by the security deposit was on the department. In their case, the Revenue failed to discharge the burden of proof that the amount of rent had been affected by the security deposit. Therefore, the impugned show cause notice was issued on erroneous grounds and was liable to be set aside.

Alternatively, it was submitted that there was no deliberate suppression of material facts by them and the show cause notice proposing to impose penalty for suppression of the facts/intentional evasion of service tax, was not sustainable. In this regard it was submitted that whenever the detail was asked from them they provided the same to the department. It was also evident from the show cause notice. They had provided the lease deed documents to the department when it was asked to produce. Hence the question of any suppression of facts did not arise. It was submitted that the Department officers found out about the security deposit from the lease deed provided by them and therefore, how the allegation of suppression of facts could be raised against them was beyond their understanding. In continuation of the same, it was submitted that the impugned show cause notice was second show cause notice for renting to them. The earlier show cause notice no.C.NO.V(ST)Adj-II/JPR-II/372/10/4583 dated 21.10.2010 was issued to them. It was also mentioned in second para of show cause notice. Hence, it was well within the knowledge of the department that they were registered as well as they had given the premises on rent. It is common practice all over India that the security deposit is taken when the building is given on rent. Hence, it was well in knowledge of the department. Thus, the second show cause notice invoking extended period was barred by time of limitation. Thus, the impugned show cause notice was liable to be set aside.

They also submitted that in the impugned show cause notice it was alleged that they did not disclose the fact about receipt of amount towards security deposit in letter form or in ST-3 return to the Department and hence suppression of facts had been alleged against them. In this regard, it was submitted that they bona fidely believed that the amount received as security deposit from their tenant did not incur any service tax liability. They submitted that the amount received as security deposit was not part of the rent but was a deposit for repair and maintenance purposes in case of any damage to the rented property by the tenant. Therefore, it was submitted that when it was their bonafide belief that the said amount was not rent and there was no service tax liability on the same, then there was no need to show the said amount in ST-3 return or to give intimation about it to the Department. Hence the extended period could not be invoked against them. The complete demand was barred by time of limitation. They once again reiterated that the above was second show cause notice on the issue. Before issuing the first show cause notice, the department should have asked for the agreement. But failure on part of department could not be termed as willful suppression on their part. The security deposit was not to be shown in ST-3 return and hence it was not shown by them. But they had not suppressed anything with an intention to evade payment of service tax. Thus, the impugned show cause notice was liable to be set aside.

They further submitted that the impugned show cause notice was proposing to recover interest for non-payment of service tax on the security deposit. In this regard, it was submitted that since the demand of service tax was not sustainable, the question of interest did not arise at all.

They further submitted that the “Renting of Immovable Property Services” was defined under Section 65(105) (zzz) of the Finance Act, 1994. The said section read as under:
“(zzzz) to any person, by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce”
Explanation1.—For the purposes of this sub-clause, “immovable property” includes—
(i) building and part of a building, and the land appurtenant thereto;
(ii) land incidental to the use of such building or part of a building;
(iii) the common or shared areas and facilities relating thereto; and
(iv) in case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate, but does not include-
(a) vacant land solely used for agriculture, aquaculture, farming, forestry, animal husbandry, mining purposes;
(b) vacant land, whether or not having facilities clearly incidental to the use of such vacant land;
(c) land used for educational, sports, circus, entertainment and parking purposes; and
(d) building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.
Explanation 2.—For the purposes of this sub-clause, an immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purposes shall be deemed to be immovable property for use in the course or furtherance of business or commerce;

A bare study of this Section clarified that only services rendered in relation to renting of immovable property are chargeable to service tax. Renting of immovable property itself was not chargeable to service tax. As such service tax was not leviable on services of renting of immovable property provided by them. With regard to the services provided in relation to renting of immovable property, they were already paying the service tax as applicable on the same. They had paid the service tax on security and other services provided by them in relation to the same. Therefore the show cause issued to them was not tenable and was liable to be quashed.

In continuation to the above it was submitted that Hon’ble Delhi High Court in case of Home Solutions Retail India Ltd. and others Vs. Union of India [2009 (237) E.L.T. 209 (Del.)] had said that-

Renting of Immovable Property not liable to Service tax but services in relation to Renting of Immovable Property taxable - Service tax being a value added tax, value addition absent in renting of immovable property for use in the course or furtherance of business or commerce - Renting of immovable property by itself cannot be regarded as a service - Renting out of immovable property by itself for business or commercial use not constitutes a taxable service as per Section 65(105)(zzzz) of Finance Act, 1994 - Any service connected with renting of immovable property covered and exigible to Service tax - Other services such as air conditioning service provided along with renting of immovable property covered - Renting of immovable property as such not liable to Service tax - Services in relation to such renting alone liable - Sections 65(90a) and 65(105)(zzzz) ibid. - In so far as renting of immovable property for use in the course or furtherance of business or commerce was concerned, they are unable to discern any value addition. They hold that Section 65(105)(zzzz) ibid does not in terms entail that the renting out of immovable property for use in the course or furtherance of business or commerce would by itself constitute a taxable service and be exigible to Service tax. [paras 35, 36]

The above judgment made it clear that the service tax could not be levied on the renting of immovable property. Therefore the show cause notice issued was not sustainable and was liable to be set aside.

They further submitted that the petition had been filed with Delhi High Court for challenging the retrospective amendment. The Hon’ble High Court granted stay in this case of HOME SOLUTIONS RETAIL LTD. Versus UNION OF INDIA [2010 (19) S.T.R. 3 (Del.)]. The decision given in the case was as follows:

Renting of Immovable Property service - Validity of retrospective amendment - Service tax held as not liable on renting itself vide order in 2009 (14)S.T.R. 433 (Del.) by High Court in respect of petitioner and appeal against such order pending in Supreme Court - Section 65(105)(zzzz) of Finance Act, 1994 amended by Finance Act, 2010 with retrospective effect from 1-6-2007 - Prima facie renting of immovable property itself regarded as service as per amendment - Notice ordered to be issued - Recovery of Service tax from petitioner in respect of renting of immovable property stayed - Petitioner liable to tax and other demands if writ petition dismissed - Writ petition not challenging Service tax on services in relation to renting and Service tax thereon liable to be paid - Sections 65(105)(zzzz) ibid. [paras 1, 2, 3, 5]

Further the AP High Court in the case of Trent Ltd. vs. Union of India and others [2010-TIOL- 402 – HC- AP-ST] had also stayed the recovery of service tax for the period June 1, 2007 to April 1, 2010. As such the benefit of doubt because of the confusions in the decisions should be allowed to the assessees. The levy was still not final and matter was still sub-judicious. Hence, they requested that the benefit of doubt was to be allowed to them and the impugned show cause notice should be quashed.

They further submitted that the impugned show cause notice was alleging that it was a fact that the order was given in favour of Home Solutions but this case was not assessee specific and its ratio was applicable all over India. Hon’ble Delhi High Court in the case of SSIPL Retail Ltd. v. UOI [2010 (18) S.T.R. 262] (Del.) had held that during the pendency of the SLP, the judgment of the High Court was applicable and in the absence of any stay from the Supreme Court, the service tax department was bound to follow the same.

Recovery of tax - Coercive action - Renting of Immovable Property service- Service tax held as not leviable on renting per se by Delhi High Court in 2009 (14)S.T.R. 433 (Del.) - Petitioner producing letters written by Department seeking payment of Service tax on such activity on the ground that special leave petition filed by it pending before Supreme Court - High Court order not stayed by Supreme Court - Respondent could not instruct their officers to ask assessees to pay tax or resort to other means to protect revenue - Manner of writing letters indicating payment of tax was demanded and threat extended in case of non-compliance - Counsel for respondent undertaking that corrective steps shall be taken and officers to be instructed not to write such letters - Writ petition disposed of - Sections 65(105)(zzzz) and 73 of Finance Act, 1994. [paras 1, 2, 3]

To their utter surprise, even after this clear cut judgement by Delhi High Court, the impugned show cause notice was still saying that the decision of Delhi High court was not applicable in their case. The order clearly said that the above decision was applicable all over India. Even the attorney general had promised to withdraw Board’s letter which was issued against this order to all the assessees. Thereafter, the High court restrained from passing the strictures against the department. Thus, the impugned show cause notice was not legally sustainable and liable to be set aside.

They further submitted that M/s E-city Bioscope & Entertainment Pvt. Ltd., was the person to whom the immovable property was given on rent by them. He had also challenged the constitutional validity of the provisions of sub section (90a) to section 65 read with section 65(105)(zzzz) & section 66 in so far it relates to the levy of service tax on the service of Renting of Immovable Property and the Notification No. 24/2007 dated 22.05.2007 and circular no. 98/1/2008-ST dated 04.01.2008 before the Hon’ble High Court of Judicature for Rajasthan, Jaipur Bench, Jaipur. They as well as the department was party to this case. The Hon’ble High Court had granted stay to the entire proceeding by passing the interim order dated 04.11.2009.

The copy of D.B. Civil Writ Petition No. 6565/2009 relating to this order was enclosed.In the aforementioned case they also were the Respondent No. 5 in the matter which was also clear from the copy of writ petition as enclosed. Further even the Service Tax Department was made a party to the said petition through Assistant Commissioner of Service Tax and Superintendent of Central Excise and Service Tax Range II. The aforesaid order was still effective and operational. Further matter was also pending before the Hon’ble Apex Court in Transfer Petition (Civil) Nos. 738-796 of 2009 wherein the issue still remained live. Hence it was clear that they also were the party in the above mentioned case which was stayed by the Hon’ble Rajasthan High Court. Therefore the contention given in the show cause notice was not justifiable in the eyes of law and liable to be set aside.

Further the allegation of impugned show cause notice regarding not mentioning if gross value of service received under the category of taxable service of renting of immovable property with intent to evade payment of service tax was also not tenable. As they had bonafide belief that the amount of security deposit was not liable for service tax and also on the basis of above mentioned case and juridical judgments as to non-payment of service tax on renting of immovable property as this was exempted. So they did not pay the service tax on the security deposit collected from the tenant and did not show it in the category of taxable services. As services of renting of immovable property was not chargeable to tax as per High court verdict as well as stay granted by High Court in their case, hence they had shown it in the category of exempted service with bonafide belief because of aforementioned cases. They had paid the service tax regularly on these services before the F.Y. 2009-10. On coming of the decision on Home solutions case they had discontinued it as the decision was in favour of the assessee. The case had already been discussed in detail in above paragraphs. They had not collected anything in the name of service tax from their tenants in the financial year 2009-10 and consequently did not pay the same as such they had no any intention to evade the payment of duty. Moreover, they could not collect the service tax as stay in their case was granted by Rajasthan High Court and it was still operational.

It was submitted that the case laws cited and the discussions here above made them believe that they were not liable to pay service tax on the renting of immovable property service. As such, penalty could not be imposed on them for their bonafide belief caused by various decisions. The Hon’ble Supreme Court had held in the case ofCOMMISSIONER OF CENTRAL EXCISE, TRICHY Versus GRASIM INDUSTRIES LTD. [2005 (183) E.L.T. 123 (S.C.)] that where the act of assessee was based on the interpretation taken by the Tribunal, penalty could not be imposed as the act was based on bonafide belief. The verdicts of Apex Court are produced as follows:-

“Penalty - Bona fide belief caused by Tribunal’s decision - Tribunal in a number of cases giving an interpretation as understood by assessee - Penalty not imposable - Rule 173Q of erstwhile Central Excise Rules, 1944 - Rule 25 of Central Excise Rules, 2002. [para 20]”

The analysis of above decision made it clear that since they had acted under bonafide belief, no penalty could be imposed on them. Therefore, the benefit of above decision of Hon’ble Supreme Court should be extended to them and the whole proceedings should be dropped.

Alternatively, it was submitted that the impugned show cause notice was proposing to impose penalties under Section 76 as well as under Section 78 simultaneously. In this regard, it was submitted that the Section 76 and Section 78 were mutually exclusive provisions and penalty could not be imposed simultaneously under the provisions of both the Sections. This had been held in the judgment given in the case of M/s Anand Agencies v/s CCE (Service Tax), Coimbatore [2010-TIOL-364-CESTAT-MAD] wherein it was held as under:

Service Tax – Penalty – Section 76 and 78 are mutually exclusive – Penalty under Section 76 set aside: CHENNAI CESTAT;

In the case of M/s Safe Test Enterprises v/s CCE, Salem [2010-TIOL-355-CESTAT-MAD] also it was held as under:

Service Tax – Penalty under Section 76 and Section 78 are mutually exclusive – penalty under Section 76 set aside and penalty under Section 78 reduced to 25% in terms of Section 73 (2) as the assessee has paid the service tax prior to the issue of show cause notice: CHENNAI CESTAT;

Thus, the impugned show cause notice was liable to be set aside as the same has been issued on extraneous grounds.

Reasoning of the judgment:-It was found that the Show Cause Notice alleged that as per the common trade practice, certain amount is obtained as interest free refundable deposit and accordingly, the rent is reduced to adjust the benefits from the deposits. Therefore, the assessee was required to pay service tax on the additional consideration received as interest of security deposits. In this context it was found that the assessee had contended that it was interest free advance deposit and could not be related to the rent of immovable property. Further, it had been contended that the said deposit was taken by them for repair of the rented property in case any damages were caused to the property by the tenant and the rent was not reduced to adjust the benefits arising from the deposits. Thus, there was no service tax liability on the security deposit collected by them from their tenant; even otherwise, it was the liability of the department to establish a nexus between the security deposit and the amount of rent, without which service tax could not be levied on the same.

In this regard, it was found that Section 67 of the Act clearly provided that only the consideration received in money for the service rendered was 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 assessee was required to discharge service tax liability. The security deposit was taken for a different purpose altogether. It was to provide for a security for repair of the rented property in case there was any damage caused by the tenant to the leased property. Thus the security deposit served a different purpose altogether and it was not a consideration for leasing of the property. The consideration of the leasing of the property was rent and, therefore, what could be levied to service tax was only rent charged and no notional interest on the security deposit could be levied to tax. There was 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 of law, as held by Apex Court in the case of Moriroku UT India (P) Ltd.- 2008-TIOL-45-SC-CT, there was 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 showed that the deposit taken had influenced the sale price, notional interest could not 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 could not be sustained.

Further, it was found that in the Show Cause Notice, though the department had alleged that as per the common trade practice, certain amount was obtained as interest free refundable deposit and accordingly, the rent was reduced to adjust the benefits from the deposits but there was no evidence on the record which could substantiate that the security deposit taken by the assessee had influenced the price i.e. the rent in any way. In absence of any such evidence, it was not possible to conclude that the notional interest on the security deposit formed part of the rent. In view of the above, it was held that notional interest on interest free security deposit would form part of the rent. In view of the above, it was held that notional interest on interest free security deposit could not be added to the rent agreed upon between the parties for the purpose of levy of service tax on renting of immovable property.

Decision:- SCN proceedings discharged.

Conclusion:-The gist of the case is that neither any amount collected by the lessor from the lessee by way of security deposit nor any interest or any other benefit derived from such deposit can be treated be as consideration for the taxable service and accordingly none of these amounts are liable to service tax until and unless, the department is able to prove that such deposit, or benefits derived from such deposit have influenced the contract price, i.e., the amount of lease rent. Hence, in this case, the Department had no evidence whatsoever to establish that the contract price had been affected by the amount of deposit or the interest earned on it. Moreover, the security deposit was refundable and it was not retained by the lessor. Therefore, as there is no provision in service tax laws to add notional earnings to arrive at the taxable value of service, no notional interest could be added to the amount of rent. Accordingly, the proceedings initiated vide the show cause notice were dropped.

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PJ/Case Study/2015-16/106
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