2025 (7) TMI 841 - AT - Service Tax

Levy of service tax - notional interest towards security deposit taken by the appellant against the renting of safe deposits and private lockers - period from April 2015 to March 2017 - HELD THAT - 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. Thus no service tax can be levied on the appellant in respect of the notional interest earned on the security deposits. The impugned order therefore deserves to be set aside - appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Tribunal was whether the Department could levy service tax on the notional interest earned by the appellant on the security deposit collected against renting safe deposit lockers and private lockers. Specifically, the issue was whether such notional interest constitutes "consideration" for the taxable service under Section 65(12) of the Finance Act, which covers "Banking and other Financial Services," and thus is liable to service tax. The dispute was confined to the period from April 2015 to March 2017, with the appellant conceding liability to pay service tax on the rental amount but contesting the charge on notional interest on security deposits.

2. ISSUE-WISE DETAILED ANALYSIS

Levy of Service Tax on Notional Interest on Security Deposit

Relevant Legal Framework and Precedents: The Tribunal referred to Section 67 of the Finance Act, which mandates that service tax is leviable on the "consideration received in money for the services rendered." The Tribunal also relied heavily on prior decisions, including the appellant's own earlier case for the period April 2012 to March 2015, where it was held that service tax cannot be levied on notional interest on security deposits. Additionally, the Tribunal cited the decision in Murli Realtors Pvt. Ltd. vs. Commissioner of Central Excise, which dealt with a similar issue concerning notional interest on interest-free security deposits in the context of renting immovable property.

Court's Interpretation and Reasoning: The Tribunal emphasized that the security deposit serves a distinct purpose from the rent-it is a safeguard against default or damages and does not constitute consideration for the leasing service. The Tribunal noted that the consideration for renting immovable property is the rent itself, and only this rent amount is subject to service tax. The Tribunal observed that there is no statutory provision in the service tax law that allows for the inclusion of notional interest on security deposits as part of the taxable value.

The Tribunal further referred to the principle established by the Hon'ble Apex Court in Moriroku UT India (P) Ltd., which held that in the absence of explicit legal provisions, notional additions to the value of taxable services cannot be made. The Tribunal also drew a parallel with excise valuation rules, where notional interest on deposits is not automatically included unless it influences the sale price.

Key Evidence and Findings: The appellant had been paying service tax on the rental amount without dispute. The Department's show cause notice sought to tax notional interest on security deposits, amounting to Rs. 6,10,238/-, which the appellant contested. The Adjudicating Authority and Commissioner (Appeals) upheld the Department's demand, relying on earlier decisions. However, the Tribunal found these decisions inconsistent with binding precedents that exclude notional interest from taxable consideration.

Application of Law to Facts: Applying the legal principles to the facts, the Tribunal concluded that since the security deposit is not consideration for the service of renting lockers, the notional interest earned thereon cannot be treated as consideration for service tax purposes. The appellant's liability is limited to service tax on the rent charged. The Tribunal held that the impugned order imposing service tax on notional interest was contrary to settled law and thus unsustainable.

Treatment of Competing Arguments: The Department argued that the notional interest earned on security deposits constitutes additional consideration and is taxable under the category of "Banking and other Financial Services." The Tribunal rejected this argument, distinguishing the purpose of security deposits from consideration for services rendered and emphasizing the absence of any statutory provision deeming notional interest as taxable consideration. The Tribunal also noted that the appellant's own prior case and other Tribunal decisions supported the appellant's position.

Conclusions: The Tribunal concluded that no service tax can be levied on the notional interest earned on security deposits against renting lockers. Since this was the main issue, other grounds raised by the appellant were not examined.

3. SIGNIFICANT HOLDINGS

"The security deposit is taken for a different purpose altogether. It is to provide for a security in case of default in rent by the lessee or default in payment of utility charges or for damages, if any, caused to the leased property. Thus, the security deposit serves a different purpose altogether and it is not a consideration for leasing of the property. The consideration of the leasing of the property is the rent and, therefore, what can be levied to Service Tax is only the rent charged and no notional interest on the security deposit taken can be levied to tax. There is no provision in Service Tax law for deeming notional interest on security deposit taken as a consideration for leasing of the immovable property."

"In the absence of a specific provision in law, as held by the Hon'ble Apex Court in the case of Moriroku UT India (P) Ltd., there is no scope for adding any notional interest to the value of taxable service rendered."

Core principles established include that only actual consideration received for services rendered is subject to service tax under Section 67, and notional or imputed amounts such as interest on security deposits do not qualify as consideration unless specifically provided by law. The Tribunal reaffirmed that security deposits are collateral and not consideration for service, thus exempting notional interest thereon from service tax.

Final determination: The impugned order charging service tax on notional interest earned on security deposits was set aside, and the appeal was allowed, confirming that no service tax liability arises on such notional interest for the period April 2015 to March 2017.