2018 (12) TMI 256 - AT - Service Tax

Valuation - inclusion of notional interest of the security deposit in assessable value - Renting of Immovable Property Service - Held that - The agreement between the appellant and M/s Granada Services Pvt. Ltd. was entered into in the month of November, 2004 much before the activity was covered by levy of service tax, therefore, it cannot be held that to evade service tax the parties have entered into an agreement to have low rent and high security deposit. Whether security deposit was with appellant or not the rent remained the same which was ₹ 5,000/- per month during the period when security deposit was with the appellant and subsequently even when security deposit was refunded and even when the entry of taxable service was yet to be entered into the Statute - thus the security deposit did not influence monthly rental. Tribunal in the case of K. Raheja Corporation Pvt. Ltd. 2015 (2) TMI 886 - CESTAT MUMBAI has held that notional interest on security deposit cannot be added to rent agreed upon between the parties for the purpose of levy of service tax for renting of immovable property. There was no reason to add notional interest in the monthly rent for the purpose of assessment of service tax - appeal allowed - decided in favor of appellant.

Summary

Issues:
- Whether notional interest on security deposit can be added to monthly rent for the purpose of levy of service tax for renting of immovable property.
- Whether the security deposit influenced the monthly rental amount.

Analysis:
1. The appeal challenged an Order-in-Original passed by the Commissioner, Customs, Central Excise & Service Tax, Noida, regarding the levy of service tax on renting of immovable property.
2. The appellants leased industrial property to a company, receiving a security deposit of ?20 crores and a monthly rent of ?5,000. The Revenue claimed that notional interest on the security deposit should be added to the rent for service tax calculation.
3. The appellants argued that the lease agreement was executed before renting became a taxable service, and the monthly rent was fixed regardless of the security deposit. They contended that notional interest should not be added as it is not specified in Section 67 of the Finance Act, 1994.
4. The appellants cited previous Tribunal decisions, including K. Raheja Corporation Pvt. Ltd. and The Lake Palace Hotel and Motels Pvt. Ltd., where it was held that notional interest cannot be added to the rent for service tax calculation.
5. The Revenue argued that the high security deposit influenced the low monthly rent, justifying the addition of notional interest.
6. The Tribunal noted that renting of immovable property became taxable in June 2007, while the agreement was made in November 2004. The monthly rent remained constant at ?5,000 even after the security deposit was refunded in 2011. Relying on precedent cases, the Tribunal held that notional interest should not be added to the rent for service tax assessment.
7. Consequently, the impugned order was set aside, and the appeal was allowed, granting the appellant consequential relief as per law.