2014 (9) TMI 461 - AT - Service Tax

Renting of immovable property - Valuation - inclusion of Notional Interest on Security - revenue contended that notional interest @ 18% of the deposit should be added to the rent received and service tax should be demanded on the notional interest on the security deposit - Held that - there is not even an iota of evidence adduced by the Revenue to show that the security deposit taken has influenced the price i.e. the rent in any way. In the absence of such evidence, it is not possible to conclude that the notional interest on the security deposit would form part of the rent. We also do not find any reason for adopting a rate of 18% per annum as rate of interest, which is neither the bank rate of interest for deposits or loans or the market rate of interest. Adoption of such an arbitrary rate militates against the concept of valuation. Notional interest on interest free security deposit cannot be added to the rent agreed upon between the parties for the purpose of levy of service tax on renting of immovable property. - Decided in favor of assessee.

Issues Involved:
1. Whether notional interest on interest-free security deposits should be added to the lease rentals for the purpose of service tax.
2. Applicability of extended period of time for demand and imposition of penalty.

Issue-wise Detailed Analysis:

1. Notional Interest on Interest-Free Security Deposits:
The primary issue in these appeals is whether the notional interest on interest-free security deposits taken by the appellants should be added to the lease rentals for the purpose of service tax. The appellants are lessors of immovable property and have taken interest-free security deposits from lessees to secure defaults in payment of rentals, utility charges, or damages to the property. The Department contended that notional interest at 18% per annum on these deposits should be added to the lease rentals to compute service tax.

The appellants argued that the security deposits are taken to safeguard the lessor's interests and are refundable. They emphasized that service tax is a transaction-based tax and the value liable to service tax is the consideration received by the service provider, as per Section 67 of the Finance Act, 1994. This section specifies that the taxable value is the gross amount charged by the service provider. The appellants cited various legal precedents, including the Supreme Court's decision in Moriroku UT India (P) Ltd. vs. State of UP, which distinguished between intrinsic value and consideration paid.

The Tribunal noted that Section 67 of the Act clearly provides that only the consideration received in money for the service rendered is leviable to service tax. The security deposit serves a different purpose and is not a consideration for leasing the property. The Tribunal referred to the absence of any provision in service tax law for deeming notional interest on security deposits as a consideration for leasing of immovable property. It also cited the Bombay High Court's decision in Commissioner of Income Tax vs. J.K. Investors (Bombay) Ltd., which held that notional interest on security deposits should not be considered for calculating actual rent.

The Tribunal concluded that in the absence of specific legal provisions and evidence showing that the security deposit influenced the rent, the notional interest cannot be added to the lease rentals for service tax purposes. The Tribunal also found the Department's adoption of an arbitrary interest rate of 18% per annum to be unjustified.

2. Extended Period of Time for Demand and Imposition of Penalty:
The appellants contended that the extended period of time for demand and imposition of penalties should not be invoked as the issue involves interpretation of statutory provisions. The Tribunal agreed, noting that in cases of interpretative nature, invoking the extended period and imposing penalties is not justified.

Conclusion:
The Tribunal allowed the appeals, holding that notional interest on interest-free security deposits cannot be added to the lease rentals for the purpose of service tax. The Tribunal also ruled that the extended period of time for demand and imposition of penalties is not applicable in this case. The stay petition was disposed of accordingly.

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