2014 (11) TMI 499 - AT - Service Tax

Tribunal: No service tax on security deposit, but tax on rent; Appellant not liable for penalty.

The tribunal ruled that no service tax is payable on the security deposit, but the rent received should be treated as the value of taxable service, and ... Service tax on Renting of Immovable Property - taxability of security deposit - treatment of rent as gross value / cum-service tax - benefit under Section 80(2) of the Finance Act, 1994Taxability of security deposit - Security deposit received under the lease agreement is not exigible to service tax. - HELD THAT: - The Court found that the security deposit is refundable on termination of the lease and therefore does not form part of the consideration for the service of renting immovable property. The adjudicatory finding that such deposits cannot be treated as part of the service provided was accepted after examining the lease agreement which showed the refundable nature of the deposit. Consequently, no service tax is payable on the security deposit. [Paras 7]Security deposit is not taxable; no service tax payable on the security deposit.Treatment of rent as gross value / cum-service tax - Rent received by the appellant constitutes the value of the taxable service and is exigible to service tax; rent cannot be treated as inclusive of service tax where the agreement specifies service tax to be paid separately and the lessee was not charged service tax. - HELD THAT: - Although the appellant contended that amounts recovered as rent should be treated as inclusive of service tax (cum-service tax) because they did not separately recover service tax from lessees, the agreement showed that service tax was to be paid separately by the lessee. As the appellant did not collect service tax from the lessee, the rent cannot be construed as cum-service tax. Therefore the correct approach is to treat the rent as the gross value of the taxable service and demand service tax accordingly. [Paras 4, 7]Rent is the taxable value of the service and service tax is payable separately on rent received.Benefit under Section 80(2) of the Finance Act, 1994 - Penalty cannot be imposed because the appellant paid service tax before 28.11.2012 and had a bona fide belief regarding the tax position; accordingly, the appellant is entitled to benefit under Section 80(2) and penalties are dropped. - HELD THAT: - The Tribunal noted the appellant's bona fide belief that service tax on renting of immovable property was not payable (pending before the Apex Court) and that the appellant had paid the service tax prior to the specified date. Although the appellant had not paid the full tax by treating amounts as cum-tax, the misunderstanding was not accepted as a reason to deny relief. Applying Section 80(2), the Tribunal held that substantial benefit of the provision cannot be denied and directed that no penalty be levied. [Paras 7]Appellant entitled to benefit of Section 80(2); penalty is dropped.Final Conclusion: The appeal is allowed in part: no service tax is leviable on the refundable security deposit; rent received is taxable and service tax is payable separately; and penalties are dropped by application of Section 80(2) of the Finance Act, 1994. Appeal disposed accordingly. Issues:1. Demand of service tax on security deposit paid on Renting of Immovable Property.2. Quantification of interest on service tax paid and penalties imposed.3. Applicability of Section 80(2) of the Finance Act, 1994.Issue 1: Demand of service tax on security deposit:The appellant appealed against the order demanding service tax on security deposit paid on Renting of Immovable Property. The appellant, as the owner of the property, received security deposits and rent from lessees. The agreement specified that the lessee would bear the service tax. The authorities demanded service tax on the total amount of security deposit and rent received by the appellant. The appellant argued that service tax should not apply to the security deposit as it is refundable, and they had not collected service tax from the lessees. The tribunal held that service tax is not payable on the security deposit, but the rent received should be treated as the value of taxable service, and service tax is payable separately on the rent amount.Issue 2: Quantification of interest and penalties:The lower authorities did not quantify the interest on service tax paid by the appellant or the penalties imposed. The appellant pleaded for the benefit of Section 80(2) of the Finance Act, 1994, as they had paid the entire service tax amount before a specified date. The tribunal found that the appellant was entitled to the benefit of dropping the penalty under Section 80(2) since they had paid the service tax before the specified date. Therefore, no penalty was leviable on the appellant.Issue 3: Applicability of Section 80(2) of the Finance Act, 1994:The appellant argued that they should be given the benefit of Section 80(2) as they had paid the service tax before the specified date. The tribunal agreed that the appellant's understanding that the rent received could be treated as cum-service tax was not acceptable. However, they held that the appellant was entitled to the benefit of dropping the penalty under Section 80(2) of the Finance Act, 1994. Therefore, no penalty was leviable on the appellant.In conclusion, the tribunal ruled that no service tax is payable on the security deposit, but the rent received should be treated as the value of taxable service, and service tax is payable separately on the rent amount. Additionally, the tribunal held that the appellant was entitled to the benefit of dropping the penalty under Section 80(2) of the Finance Act, 1994, and no penalty was leviable on the appellant.