2024 (3) TMI 68 - AT - Service Tax

Levy of service tax - notional interest on the security deposit collected by the appellant at the time of renting out the property and fixing the monthly rent - HELD THAT - The issue is no longer res-integra and has been decided in favour of the assessee by the this Tribunal in Murali Realtors Private Ltd vs Commissioner of Central Excise, Pune 2014 (9) TMI 461 - CESTAT MUMBAI which was followed in M/s Singhal Premises, Pvt Ltd Vs Commissioner, Central Excise, Jaipur 2023 (10) TMI 1166 - CESTAT NEW DELHI , where the Bench held that service tax could not have been levied on the notional interest calculated by the department on the interest fee security deposit collected by the appellant from tenants. In the present case, the appellant had not disputed their liability to pay service tax on the rental amount of the property as they are paying service tax on the same and therefore the dispute is limited regarding the liability to pay service tax on the notional interest earned by them on the amount of security deposits received from the service recipients - no service tax can be levied on the appellant in respect of the notional interest earned on the security deposits. Since the main issue decided in favour of the appellant, it is not necessary to go into the other grounds of challenge raised in the appeal. The impugned orders are set aside - appeal allowed.

Summary

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.