service tax on interest free loan

[pankaj jain]

I have taken as advance for our capital assets expansion for providing exempted service on interest free basis and the same is deducting from service charges receipts,which is an exempt service during f.y.2014-2015.Department view is that , ' since the service receiver has given the advance amount interest free the interest incurred @ 8.75% on ₹ 20000000/- or as the case may be , should be part of the Taxable value for the purpose of discharging of service tax liabilities.' We have already mentioned the above mentioned amount in our Balance - Sheet . Is advance taken on interest free basis liable to service tax ?

[Rajagopalan Ranganathan]

Sir,

As per rule 5 of Service Tax (Determination of Value) Rules, 2006 interest accruable on advance received from service receiver by the service provider does not qualify as expenditure or costs to be added to the service charges charged by the service provider for calculating service tax payable.

[KASTURI SETHI]

Sh.Pankaj Jain Ji,

In this case, the amount of advance does not qualify as advance towards taxable service. Hence not taxable. However, if interest free advance influences the taxable value of service (taxable) directly or indirectly in any way, then notional interest on loan will form the part of taxable value. So it depends upon the terms and conditions of the agreement. Here does not appear such situation. The non-inclusion of interest accrued (able) into taxable value as Rule 5 of Service Tax (Determination of Value) Rules, 2006 is not applicable in every situation.

[Ganeshan Kalyani]

Sir, as per section 65B (44) of the Finance Act, 1994, service is defined as :

(44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-....

The above provision states that there should be:

1. Activity 2. Service provider 3. Service recipient 4. Consideration.

So as to determine the consideration is taxable or not the above points in the definition is to be taken into consideraion.

The interest which is discussed by the department is not for the service provided by one person to another and it is not a consideration.

Thanks.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

I fully support your views.(100%). You have echoed my views.

[Ganeshan Kalyani]

Thanks Sri Kasturi Sir.

[pankaj jain]

Thanks to all for your valuable comments . I want to share a case law here on the above mentioned issue. Hope it will help for solving the query . Please peruse - Reliance infratel Vs. Commissioner of Service tax , Mumbai - II (2015 (4) TMI 129 - CESTAT MUMBAI.

[KASTURI SETHI]

Dear Sir,

The department's appeal is pending with Supreme Court.

Valuation (Service Tax) - Advances granted to subsidiary of Reliance Communications by way of Inter Corporate Deposits for services to be rendered - Whether leviable to Service Tax, though such amount not mentioned in agreement and incurred by RCM before its demerger?

The Supreme Court Bench comprising Hon’ble Mr. Chief Justice H.L. Dattu and Hon’ble Mr. Justice Arun Mishra on 5-11-2015 after condoning the delay issued notice in the Civil Appeal No. 13379 of 2015 (Civil Appeal Diary No. 35472 of 2015) filed by Commissioner of Service Tax, Mumbai-II against the CESTAT Final Order No. A/579/2015-WZB/STB, dated 4-3-2015 as reported in 2015 (4) TMI 129 - CESTAT MUMBAI = 2015 (39) S.T.R. 829 (Tri. - Mumbai)(Reliance Infratel Ltd. v. Commissioner). While issuing notice in the appeal, the Supreme Court passed the following order :

“Delay condoned.

Notice.”

The Appellate Tribunal in its impugned order had held that the advance amount towards loan granted to subsidiary of Reliance Communications Ltd. (RCM) by way of Inter Corporate Deposits, was not qualified as advance towards Business Support services to be rendered and therefore, not leviable to Service Tax inasmuch as the Master Service Agreement did not show that such amount received was in the nature of advances for services to be rendered and also, the amount returned/repaid in spite of fact that the same was incurred by RCM before its demerger when it was single entity and no different entities such as the service provider and the service recipient were there at that stage, which was the pre-requisite for the levy of Service Tax.

[Commissioner v. Reliance Infratel Ltd. - 2016 (42) S.T.R. J82 (S.C.)]

[Ganeshan Kalyani]

Sir, on plain reading of the case law cited it seems that the contention was that there should be two separate person one is provider and the other being receiver of service for levy of service tax. Thanks.

[Venkataprasad Pasupuleti]

in the following cases it was held that service tax is not liable on notional interest

- Murli Realtors Pvt. v. Commissioner - 2015 (37) S.T.R. 618 (Tribunal) = 2014 (9) TMI 461 - CESTAT MUMBAI

- K. Raheja Corp. (P) Ltd. v. Commissioner - 2015 (2) TMI 886 - CESTAT MUMBAI

[KASTURI SETHI]

Facts and circumstances are not always the same. So each case has to be examined in its own perspective.

[Ganeshan Kalyani]

Sir, Sri Kasturi Sir I agree with your views in toto.

Sri, Venakata, the case law cited by you pertain to security deposit in connection with service provided / to be provided. But in case of query raised by Sri Pankaj ji, is of advance taken which has no connection with the service. Thus in my view the cited case may not apply. Thanks.

AI Summary

Interest-free advance taxability: notional interest may be included if the advance constitutes consideration or affects taxable service value. Whether an interest-free advance forms part of taxable value depends on whether it constitutes consideration for a service or otherwise influences taxable value; Rule 5 of the Service Tax (Determination of Value) Rules, 2006 excludes interest accruable on advances from automatic inclusion, but notional interest may be included where the advance directly or indirectly affects the taxable value, requiring contractual and factual analysis of the advance's connection to the service.