Interest Free Security Deposits Are Not Exigible To Service Tax: CESTAT Ahmedabad

The Bench, consisting of members Ramesh Nair (Judicial Member) and Raju (Technical Member), held that there is no provision in the Service Tax law that allows notional interest on refundable security deposits to be added to the value of service so as to attract service tax.

The appellant/ Assessee Marwadi Shares & Finance Ltd is engaged in the business of providing banking, financial and Stock Broker's services. During the course of audit conducted by the revenue department, it was observed that the appellant was charging annual maintenance charges from its clients holding Demat Account with the appellant and was paying service tax on the said charges. However, the appellant was not paying service tax in respect of clients who had opted for "Deposit Schemes". Thereafter, show cause notices were issued to the appellant demanding service tax and proposing penalty under Section 77 and 78 of the Finance Act, 1994, which was confirmed by the lower adjudicating authority. Against this order, the appellant filed an appeal before the Commissioner (Appeals), who dismissed the appeal. Against the order of the Commissioner (Appeals), the appellant filed an appeal before the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Ahmedabad.

The appellant Marwadi Shares & Finance Ltd submitted before the CESTAT that no service tax was chargeable on the interest free deposits kept by the appellant, since the said deposits were kept to be solely used as a security deposit in case the clients defaulted in payment. The appellant averred that there cannot be any service tax demand on a refundable deposit. The appellant thus contended that the Commissioner (Appeals) could not have confirmed the service tax demand by holding the amount as a consideration for rendering any service. The appellant submitted that a refundable deposit is not a "charge" collected by the service provider for providing a service. The appellant added that the security deposit collected by it was not used by it as a payment for providing any service, therefore, the recovery of service tax on such security deposit was against the provisions of Section 67 of the Finance Act, 1994.

Section 67 of the Finance Act, 1994 provides for valuation of taxable services for charging service tax. Section 67 (3) provides that the gross amount charged for a taxable service shall include any amount received towards the taxable service, whether before, during or after the provision of such service.

The CESTAT held that an "Interest Free Deposit" does not represent value of any taxable service. The Tribunal observed that the said refundable deposit was kept by the appellant only as a security deposit in case of any default made by the client in making payment.

The CESTAT ruled that the amount collected by the appellant from its clients was an interest free refundable deposit which was not collected with respect to a service. The CESTAT thus held that the interest free deposit collected by the appellant was not taxable, since it was not a consideration for providing a service.

The CESTAT held that under Section 67 of the Finance Act, 1994, a "taxable value" is a consideration, whether in monetary or non-monetary form. Thus, the CESTAT added, if any benefit accrued to a party which was not in the nature of consideration, the same could not be added to the value of a service under Section 67 of the Finance Act, 1994.

The CESTAT added that there is no deeming provision for increasing the value of a consideration under Section 67 of the Finance Act, 1994 or in the Service Tax (Determination of Value) Rules, 2006 framed thereunder. The CESTAT held that only the consideration received for the service provided is exigible to service tax, and notional interest on the deposit taken does not attract service tax.

The CESTAT ruled that there was no provision in the Service Tax law that allowed notional interest on refundable security deposit to be added to the value of service so as to be exigible to service tax.

The CESTAT noted that the Supreme Court in the case of Commissioner of Service Tax versus M/s. Bhayana Builders (2018) had explained the scope of Section 67 of the Finance Act, 1994 and had ruled that any amount charged which has no nexus with the taxable service, and which is not a consideration for the service provided, does not become a part of the taxable value under Section 67.

The CESTAT thus allowed the appeal and set aside the order of the Commissioner (Appeals).

Case Title: Marwadi Shares & Finance Ltd versus C.C.E. & S.T.-Rajkot

Dated: 12.04.2022 (CESTAT Ahmedabad)

Representative for the Appellant: S. Bissa, Advocate

Representative for the Respondent: Ghanshyam Soni, Joint Commissioner