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2021 (1) TMI 554 - AAAR - GSTValuation of Rental Income - Deduction of property taxes and other statutory levies - treatment of notional interest on the security deposit - exemption of tax under the general exemption of ₹ 20 lakhs - challenge to AAR decision. Whether the property tax paid by the Appellant to the Municipal Authority can be deducted from the monthly rental income received? - HELD THAT - In this case, the fact that the supplier and the recipient of the service (i.e lessee) are not related and that the rent is the sole consideration for the service of renting of immovable property, are not in dispute. It is seen from the draft rental agreement that the lessee is required to pay monthly rental of ₹ 1,50,000/- plus applicable taxes, subject to deduction of tax as may be applicable. Therefore, the amount received from the lessee towards the monthly rent as per the invoice that will be raised by the Appellant, will be the transaction value and it is on this value that GST has to be paid - Section 15(2) of the CGST Act, provides for certain inclusions to the value of supply. One such inclusion is that all taxes levied under any law in force will be included in the value. The only taxes which qualify for exclusion from the value are the CGST, SGST, IGST, UTGST and Compensation Cess which are levied under the respective Acts. Even in respect of these taxes, they can be permissible deductions subject to the condition that the supplier charges them separately in the invoice. Other than the above levies, no other statutory levy can be deducted from the value of supply. All taxes levied under any law in force are to be included in the value of the renting of immovable property service supplied by the Appellant. Therefore, the property tax paid to the Municipal Authority (BBMP) cannot be deducted from the monthly rental income for arriving at the value of supply. Whether the notional interest on the security deposit is to be included for the purpose of calculating the total rental income? - HELD THAT - This is a concept which has been deliberated at length by many Courts with respect to the Income Tax Act. As far as GST law is concerned, the issue is to be examined in the context of 'supply' and the 'consideration' received for the supply. What constitutes a 'supply' in GST has been provided in Section 7 of the CGST Act and it includes all forms of supply (such as rental) made or agreed to be made for a consideration. In this case, the monthly rental received from the lessee is a consideration for the supply of the renting service. The terms of the rental agreement also state that the lessee shall pay an interest free refundable security deposit of ₹ 5 crore which will be returned to lessee upon vacation of the scheduled property - The interest is paid by the person with who the amount is invested. The interest earned by the supplier from a third person, on account of investing the security deposit amount is not a payment made by the third person in respect of, in response to, or for the inducement of the supply of the renting service. There is no connection between the payment of interest by the third person and the renting service supplied by the supplier to the lessee. The phrase in respect of, in response to, or for the inducement of used in the above definition of 'consideration' as given in Section 2(31)(a) of the CGST Act, means there must be a direct link between the supply of the service and the consideration received in the form of interest on the security deposit. Such a connection is absent in this case. The decision of AAR modified.
Issues Involved:
1. Deduction of property taxes and other statutory levies from rental income. 2. Inclusion of notional interest on the security deposit in total rental income. 3. Entitlement to tax exemption under the general exemption of ?20 lakhs. Detailed Analysis: Issue 1: Deduction of Property Taxes and Other Statutory Levies from Rental Income - Appellant's Argument: The appellant argued that property taxes levied by the Municipal Corporation are not part of the rental services rendered and should not be included in the rental income for GST purposes. They contended that property tax is not related to the consideration for rental service and should be abatable from the total rental income. - AAR's Ruling: The AAR held that property taxes and other statutory levies cannot be deducted for the purpose of arriving at the value of rental income. - Appellate Authority's Decision: The Appellate Authority upheld the AAR's decision, stating that Section 15 of the CGST Act governs the value of supply, which includes all taxes levied under any law in force, except CGST, SGST, IGST, UTGST, and Compensation Cess if charged separately. The authority noted that there is no provision under GST law for the abatement of property tax from the value of taxable service of renting of immovable property, unlike the previous service tax regime. Therefore, property tax paid to the Municipal Authority cannot be deducted from the monthly rental income for arriving at the value of supply. Issue 2: Inclusion of Notional Interest on the Security Deposit in Total Rental Income - Appellant's Argument: The appellant argued that notional interest on the security deposit should not be added to the total rental income unless it can be shown that the interest-free deposit has influenced the rent. They cited various court decisions, including a Supreme Court decision, supporting their view that notional interest cannot be added without evidence of its influence on the rental price. - AAR's Ruling: The AAR held that notional interest on the security deposit should be considered for computing the total income from rentals if it influences the value of supply. - Appellate Authority's Decision: The Appellate Authority disagreed with the AAR's findings. They examined the definition of 'consideration' under Section 2(31) of the CGST Act and concluded that the security deposit is not a consideration for the renting service unless it is applied as such by the supplier. The authority noted that the interest earned on the security deposit is not a payment made in respect of or for the inducement of the renting service and has no direct link to the supply of the service. Therefore, the notional interest earned on the security deposit is not to be included in the total rental income. Issue 3: Entitlement to Tax Exemption under the General Exemption of ?20 Lakhs - AAR's Ruling: The AAR ruled that the appellant is entitled to the general exemption of ?20 lakhs, subject to the condition that their annual turnover, including monthly rent and notional interest (if it influences the value of supply), does not exceed the threshold limit. - Appellate Authority's Decision: The Appellate Authority did not specifically address this issue in their order, but by ruling that notional interest is not to be included in the total rental income, it can be inferred that the appellant's entitlement to the exemption would be based on their actual rental income without the inclusion of notional interest. Order: The Appellate Authority modified the advance ruling as follows: 1. The appellant cannot deduct property tax or other statutory levies from the rental income, except for CGST, SGST, IGST, and Compensation Cess if charged separately. 2. The notional interest earned on the security deposit is not to be taken into consideration for arriving at the total rental income. The appeal filed by the appellant is disposed of on these terms.
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