Trustee-held security deposits escape service tax, penalties fail without suppression, but mandatory late fee remains payable.

Amounts collected from flat owners as an interest-free management security and later transferred to the residents' society were treated as trustee-held funds, not consideration for taxable service, so service tax on the deposit was not sustainable. Penalties under Sections 78 and 77(2) were also held unwarranted because the delay stemmed from disruption caused by freezing of bank withdrawals, with no suppression, contumacious conduct, or intent to evade tax. However, the late fee under Section 70 read with Rule 7C was upheld because the levy was treated as mandatory despite reasonable cause for delayed filing of returns.

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Issues: (i) Whether the demand of service tax on the amount collected as security deposit from flat owners was sustainable; (ii) Whether penalties under Sections 78 and 77(2) of the Finance Act, 1994 were leviable; (iii) Whether the late fee under Section 70 of the Finance Act, 1994 read with Rule 7C of the Service Tax Rules, 1994 was liable to be interfered with.

Issue (i): Whether the demand of service tax on the amount collected as security deposit from flat owners was sustainable.

Analysis: The amount was collected from the flat owners as an interest-free management security and was subsequently handed over to the society formed by the flat owners. The arrangement showed that the appellant held and transferred the amount as a trustee and in the nature of a pure agent, without retaining it as consideration for taxable service.

Conclusion: The demand of service tax on the security deposit was not sustainable and was set aside in favour of the assessee.

Issue (ii): Whether penalties under Sections 78 and 77(2) of the Finance Act, 1994 were leviable.

Analysis: The delay in payment and compliance was found to have arisen from disruption in business caused by freezing of withdrawals from the appellant's bank account, and there was no suppression of facts, contumacious conduct, or intent to evade tax. The registration was also taken suo motu, and the Revenue did not establish taxable receipts prior to registration so as to justify penalty for late registration.

Conclusion: The penalties under Sections 78 and 77(2) were not leviable and were set aside in favour of the assessee.

Issue (iii): Whether the late fee under Section 70 of the Finance Act, 1994 read with Rule 7C of the Service Tax Rules, 1994 was liable to be interfered with.

Analysis: Though there was reasonable cause for the delayed filing of returns, the levy of late fee was treated as non-discretionary.

Conclusion: The late fee under Section 70 read with Rule 7C was sustained against the assessee.

Final Conclusion: The appeal succeeded only on the issues relating to tax on the security deposit and the penalties, while the late fee was maintained, with consequential refund or adjustment of excess tax, interest, and set-aside penalty amounts.

Ratio Decidendi: Amounts collected and transferred as a trustee or pure agent, without retaining the character of consideration, do not attract service tax; penalties require a finding of suppression or intent to evade, while a mandatory late fee is not waived merely because reasonable cause exists.

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