2024 (3) TMI 68 - AT - Service Tax

Service tax cannot be levied on notional interest calculated on security deposits collected from tenants

M/s Shubham Resorts (P) Ltd. Versus Commissioner (Appeals), Central Excise & & Central Goods And Service Tax, Jaipur

M/s Shubham Resorts (P) Ltd. Versus Commissioner (Appeals), Central Excise & & Central Goods And Service Tax, Jaipur - TMI Issues involved:The issue in the present case involves the levy of service tax on the notional interest on security deposits collected by the appellant at the time of renting out the property.Summary:1. Background and Appeals Filed:The appellant challenged the order affirming the demand of service tax on notional interest on security deposits collected while renting out properties. Multiple appeals were filed before the Tribunal regarding this issue.2. Service Tax Registration and Audit Findings:The appellant, registered under Service Tax for 'Renting of Immovable Property Service,' collected interest-free refundable security deposits. The department's audit revealed the appellant had not computed the taxable value of rent equivalent to notional interest on security deposits, leading to the service tax demand.3. Show Cause Notice and Adjudication:A show cause notice alleged additional consideration earned as notional interest on security deposits, leading to a demand for service tax. The adjudicating authority confirmed the demand, which was challenged by the appellant before the Commissioner (Appeals).4. Appellant's Argument:The appellant argued that notional interest can only be included in taxable value if it impacts rental charges. They contended that the security deposits did not affect rental prices, and thus, no additional consideration should be taxed. Previous Tribunal decisions supported this stance.5. Revenue's Position and Tribunal Orders:The Revenue supported the lower authorities' findings. However, referencing previous Tribunal decisions, it was established that notional interest on security deposits cannot be subjected to service tax.6. Tribunal Decision and Rationale:The Tribunal ruled in favor of the appellant, stating that service tax cannot be levied on notional interest earned on security deposits. Since the appellant was already paying tax on rental amounts, no tax was applicable on the interest earned. The appeals were allowed, setting aside the impugned orders.This judgment clarifies the taxability of notional interest on security deposits in the context of renting out properties, aligning with established legal principles and precedents.