2013 (7) TMI 669 - AT - Service Tax

Tribunal rules notional interest on security deposits not taxable without evidence

MAGARPATTA TOWNSHIP DEVELOPMENT & CONSTRUCTION CO LTD Versus COMMISSIONER OF CENTRAL EXCISE, PUNE-III

The Tribunal ruled in favor of the appellant, a service provider facing a service tax demand based on notional interest of security deposits collected ... Renting of immovable property - taxability of notional interest on interest free security deposit – Held that:- There was 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 - the appellant had followed the practice of taking security deposit for the premises rented out on lease basis was common throughout the country and the amount of security deposit taken also varies from place to place and also depends on the property whether it was for commercial or residential purpose – court followed the judgement of CCE, Mumbai-III vs. ISPL Industries Ltd. (2003 (4) TMI 99 - SUPREME COURT OF INDIA 2003). - appellant had made out a case in their favour for grant of stay – stay granted. Issues:Service tax liability on notional interest of security deposit collected by the appellant.Analysis:The appellant, a service provider engaged in various services including renting of immovable property, was faced with a service tax demand of Rs.3,26,12,102/- for the period 01/06/2007 to 31/01/2011 along with interest and penalty. The demand was based on the department's view that notional interest on the security deposit collected by the appellant should be considered as part of the consideration for renting the immovable property. The appellant argued that the security deposit was taken for damages and had no nexus with the rent amount. They relied on a decision of the Hon'ble apex court to support their argument that notional interest cannot be added to the assessable value unless there is evidence to show that it influenced the price. The appellant contended that there was no evidence to prove that the security deposit influenced the rent amount, and it was merely a presumption on the part of the revenue.The Ld. Additional Commissioner for the Revenue reiterated the findings of the adjudicating authority, but the Tribunal, after considering the submissions from both sides, held that the practice of taking security deposits for rented premises is common and varies based on the property type and location. The Tribunal noted that there was no evidence presented by the revenue to show that the notional interest on the security deposit influenced the consideration for renting. Citing the apex court decision in a similar case, the Tribunal agreed with the appellant's argument that unless there is evidence to prove such influence, notional interest should not be considered. Therefore, the Tribunal granted an unconditional waiver from pre-deposit of dues and stayed the recovery during the appeal's pendency, indicating a prima facie case in favor of the appellant.