2015 (8) TMI 1248 - AT - Service Tax

Renting of Immovable Property Service - Valuation - Inclusion of notional interest - Penalty u/s 77 - Held that - Appellants have received a huge sum of Rs, 20 crores, interest free as security deposit at the time of execution of the agreement. The monthly rental fixed is so nominal in regard to the property that is leased. Again, the renewal terms of the agreement are that the agreement can be renewed up to 20 years. If renewed to such extended period, the refund of the security deposit need to be made only after 20 years. But as to the rate of rent, it is specifically stated that the rent shall not be revised or enhanced even if the agreement is renewed for extended periods. Further, there is a lock-in-period of 5 years whereby the appellant is assured to retain the deposit for a period of 5 years even in the event of the Lessee/ GSPL terminating the agreement prior to the expiry of 5 years. The judgments rendered in K. Raheja Corp. (P) Ltd. 2015 (2) TMI 886 - CESTAT MUMBAI and Murli Realtors Pvt. 2014 (9) TMI 461 - CESTAT MUMBAI where the Tribunal has held that notional interest on interest free security deposit cannot be added to the rent agreed between the parties for the purpose of levy of service tax on renting of immovable property, is not applicable to the present case. The facts of the instant case stands on a different footing for the reason that the security deposit is very huge and the rent fixed is reduced to a nominal amount in regard to the property leased - the appellants have not been able to make out a case for full waiver of pre-deposit - stay granted partly.

Summary

Issues:
1. Whether loading notional interest on an interest-free security deposit should be considered for the valuation of taxable service in the case of renting of immovable property.
2. Whether the security deposit received by the appellant should be considered as part of the charges for leasing the premises.
3. Whether the appellants are liable to pay service tax on the notional interest of the security deposit.

Issue 1: Valuation of Taxable Service
The case involved a dispute regarding the loading of notional interest on an interest-free security deposit for the valuation of a taxable service in the context of renting of immovable property. The Revenue contended that the monthly rent agreed upon was influenced by the security deposit, and therefore, notional interest should be added for proper valuation. The Tribunal considered the arguments presented by both parties and observed that the conditions of the agreement indicated that the monthly rent was not the sole consideration for the lease. The Tribunal found merit in the Revenue's arguments, suggesting that the loading of notional interest on the security deposit was justified for the valuation of the taxable service.

Issue 2: Consideration of Security Deposit
The appellants argued that the security deposit received should not be considered as part of the charges for leasing the premises since it was refundable. However, the Tribunal noted that the security deposit of a substantial amount received by the appellant was not merely intended for securing defaults in rent or damages. The terms of the agreement, including a lock-in period and non-revision of rent even upon renewal, indicated that the security deposit served a significant purpose beyond a standard refundable deposit. The Tribunal concluded that the security deposit should be considered as part of the overall consideration for the lease.

Issue 3: Liability for Service Tax
The appellants contended that they should not be liable to pay service tax on the notional interest of the security deposit. They argued that the loading of notional interest was not supported by the service tax regime and referenced legal judgments in support of their position. However, the Tribunal differentiated the present case from the cited judgments based on the substantial amount of the security deposit and the nominal rent fixed in the agreement. The Tribunal acknowledged the practice of loading notional interest in other tax levies and directed the appellants to deposit 50% of the demand with interest within a specified period, failing which the appeal would be dismissed for non-compliance.

In conclusion, the judgment by the Appellate Tribunal CESTAT NEW DELHI addressed the issues concerning the valuation of taxable service, consideration of the security deposit, and the liability for service tax in the context of renting of immovable property. The Tribunal found in favor of considering notional interest on the security deposit for valuation purposes and concluded that the security deposit formed part of the overall consideration for the lease. The appellants were directed to make a partial deposit as per the Tribunal's order to avoid dismissal of the appeal for non-compliance.