Notional Interest on Security Deposits for Locker Rentals Not Taxable as Service Value: CESTAT [Read Order]

The New Delhi Principal Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that notional interest on interest-free security deposits collected for locker rentals cannot be added to the value of taxable services and is not subject to service tax.

Ratna Sagar Safe Deposit Vaults Pvt. Ltd., the appellant, provides locker services and collects two separate amounts from its customers: a fixed rental charge and a refundable, interest-free security deposit.

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For the period from April 2012 to March 2016, the department issued a show cause notice demanding Rs. 23,45,350 as service tax, arguing that the notional interest on the security deposit should be treated as part of the consideration for services and included in the taxable value. The adjudicating authority confirmed the demand, and the Commissioner (Appeals) upheld the order. Aggrieved by the decision, the appellant filed an appeal before the CESTAT.

The appellant’s counsel argued that a similar issue had already been decided in its favour by the Tribunal for the previous period from April 2006 to March 2012. They submitted that under Section 67 of the Finance Act, 1994, only the actual amount received as consideration for a service can be taxed.

The security deposit, being refundable and not used by the company to earn any income, could not be considered as part of the service value. It was meant to protect the company from default or damage, not as a payment for services. They relied on the Tribunal’s decision in Murli Realtors Pvt. Ltd. v. CCE, Pune-III, which held that notional interest cannot be taxed in the absence of a specific legal provision.

The two-member bench comprising Binu Tamta (Judicial Member) and Hemambika R. Priya (Technical Member) referred to its earlier order and the decision in Murli Realtors. The tribunal observed that there was no evidence that the security deposit had any impact on the rent charged or was part of the service consideration. It explained that Section 67 allows taxation only on amounts actually received for services.

Since the security deposit was refundable and no real income or interest was earned from it, notional interest could not be added to the value of the taxable service. The tribunal set aside the impugned order and allowed the appeal. It ruled that service tax cannot be levied on notional interest attributed to interest-free security deposits collected for locker rentals

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