CESTAT Rules, Service Tax Can’t Be Levied On Notional Interest Calculated By Dept. On Interest Free Security Deposit
Pranav B Prem
The Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that service tax cannot be levied on the notional interest computed by the department on interest-free security deposits collected by service providers. The Tribunal observed that such notional interest does not qualify as consideration for the provision of service and therefore, cannot be included in the taxable value.
The ruling was delivered by a division bench comprising Dr. Rachna Gupta (Judicial Member) and Ms. Hemambika R. Priya (Technical Member) in a batch of appeals filed by M/s Jyotsna Vaults. The appeals challenged a common order passed by the Commissioner (Appeals), Central Excise & CGST, Jaipur, which had upheld the levy of service tax on the notional interest component calculated by the department.
The appellant, M/s Jyotsna Vaults, is engaged in the business of renting private lockers, a service covered under the category of banking and other financial services. The dispute arose in relation to the period from April 2012 to March 2015. During this period, the appellant had charged rent from customers for locker services and had also collected interest-free refundable security deposits. The department alleged that although the rent component was subjected to service tax, the notional interest, which the department presumed the appellant would have earned from the interest-free security deposit, was not included in the taxable value. Based on this premise, three separate show cause notices were issued proposing demands totaling approximately ₹7 lakhs. These demands were later confirmed through orders-in-original, and subsequent appeals were dismissed by the Commissioner (Appeals), which led to the current appeals before the Tribunal.
The appellant contended that the issue is no longer res integra and has already been decided in their favour in the case of Binani Safe Deposit Vaults Pvt. Ltd [2023 (10) TMI 498 – CESTAT NEW DELHI] and in their own earlier proceedings before the Tribunal. The counsel placed reliance on several precedents including Moriroku UT India (P) Ltd. v. State of UP [2008 (3) TMI 513 – Supreme Court ] and Murli Realtors Pvt. Ltd. v. CCE, Pune-II [2014 (9) TMI 461 – CESTAT Mumbai], to argue that only actual monetary consideration received for a service can be subjected to tax.
In examining the issue, the Tribunal considered the scope of Section 67 of the Finance Act, which defines taxable value in terms of "gross amount charged" by the service provider. The Tribunal observed that a security deposit serves the purpose of securing against possible defaults or damages and is not a component of consideration for the actual renting service. Quoting from the Tribunal’s earlier ruling in Murli Realtors, it reiterated that: “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. Therefore, in the absence of a specific provision in law… there is no scope for adding any notional interest to the value of taxable service rendered.”
The Tribunal found no justification to differ from its earlier decisions and held that since the only consideration for renting lockers was the agreed rent, which was already subjected to tax, no additional tax could be imposed on a hypothetical amount that was neither received nor assured. Accordingly, the CESTAT set aside the order passed by the Commissioner (Appeals) and allowed all three appeals filed by the assessee.
Appearance
Present for the Appellant: Shri Sanjiv Agarwal, Chartered Accountant
Present for the Respondent: Shri Shashank Yadav, Authorized Representative
Cause Title: M/s Jyotsna Vaults v/s Commissioner (Appeals), Central Excise And Central Goods And Service Tax, Jaipur
Case No: Service Tax Appeal No. 52501 of 2018
Coram: Hon’ble Dr. Rachna Gupta [Member (Judicial)], Hon’ble Ms. Hemambika R. Priya [Member (Technical)]
[Read/Download order]
