2018 (8) TMI 247 - AT - Service Tax

Renting of Immovable Property Service - notional interest accruing on the lumpsum amounts received by the appellant from M/s Vibrant Academy (India) Pvt. Limited. - The case of the Department is that in addition to the service tax payable on the rent, the liability for the tax also extends to the notional interest accruing on the lumpsum deposit received by the appellant from the lessee - Held that - Such a stand is not justified particularly in view of the decision of the Tribunal in the case of Murli Realtors Pvt. Ltd. 2014 (9) TMI 461 - CESTAT MUMBAI , where it was held that notional interest on interest free security deposit cannot be added for the purpose of levy of service tax on renting of immovable property. There is no justification for inclusion of the notional interest in the consideration for payment of service tax - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Liability to pay service tax on notional interest accruing on lump sum amounts received under a lease agreement.
2. Interpretation of lease agreement terms regarding lump sum amounts received and their adjustment towards rent.
3. Applicability of service tax on renting of immovable property.
4. Justification for inclusion of notional interest in consideration for payment of service tax.

Analysis:
1. The appellant entered into a lease agreement with another party, receiving lump sum amounts as part of the agreement. The revenue claimed the appellant was liable to pay service tax on the notional interest accruing on these amounts. The lower authorities upheld this view, leading to the filing of the present appeal challenging the service tax demand.

2. The appellant argued that the lump sum amounts were received as interest-free security deposits to cover potential damages and unpaid rent. The lease agreement specified that a portion of the deposit would be adjusted towards rent for the last five months of the lease period. The appellant relied on a Tribunal decision supporting their stance that notional interest on interest-free security deposits should not attract service tax.

3. Upon reviewing the lease agreement and the terms regarding the lump sum amounts received, the Tribunal found that a specific amount was designated to be adjusted towards rent for the leased premises. This amount was considered as consideration for the taxable service of renting of immovable property, falling within the purview of service tax liability as per the Finance Act, 1994.

4. However, the Tribunal rejected the revenue's argument that notional interest on the lump sum deposit should also attract service tax. Citing a previous Tribunal decision, it emphasized the lack of evidence showing that the security deposit influenced the rent amount. The Tribunal concluded that notional interest on interest-free security deposits should not be included in the consideration for service tax payment. Consequently, the impugned order demanding service tax on notional interest was set aside, and the appeal was allowed.

This detailed analysis of the judgment highlights the key issues addressed by the Tribunal regarding the liability to pay service tax on notional interest, the interpretation of lease agreement terms, the applicability of service tax on renting of immovable property, and the justification for excluding notional interest from the service tax consideration.