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

Interest-free refundable security deposits are not exigible (liable to be exacted or required) to service tax since they are not collected in consideration for providing a service, rules, The Ahmedabad Bench of the customs, excise & service tax appellate tribunal (CESTAT). 

The case pertains to Marwadi Shares & Finance Ltd (appellant or assessee), which is engaged in providing banking, financial and stock broker’s services. During an audit conducted by the revenue department, it was observed that the appellant was charging annual maintenance charges (AMC) from its clients holding demat accounts and was paying service tax on it. However, Marwadi Shares & Finance was not paying service tax regarding clients who had opted for deposit schemes. 

Thereafter, show cause notices were issued to the appellant demanding service tax and proposing a penalty under sections 77 and 78 of the Finance Act, 1994 (the Act), which the lower adjudicating authority confirmed.

Against this order, Marwadi Shares & Finance filed an appeal before the commissioner (appeals), who dismissed the appeal. Against the commissioner’s order (appeals), the appellant filed an appeal before the CESTAT bench at Ahmedabad.

Marwadi Shares & Finance submitted before the CESTAT that no service tax was chargeable on the interest-free deposits kept by the appellant since the said deposits were solely used as a security deposit in case the clients defaulted in payment. The appellant argued that there could not be any service tax demand on a refundable deposit. 

It contended that the commissioner (appeals) could not have confirmed the service tax demand by holding the amount as 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. 

Marwadi Shares & Finance added that the security deposit collected was not used by it as a payment for providing any service. Therefore, the recovery of service tax on such security deposits was against section 67 of the Act.

Section 67 of the Act provides for the 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.

Concluding the order in favour of the assessee, the CESTAT held that an ‘interest-free deposit’ does not represent the value of any taxable service. The Tribunal observed that the said the appellant kept a refundable deposit 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 Marwadi Shares & Finance from its clients was an interest-free refundable deposit that was not collected concerning 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 Act, a ‘taxable value’ is a consideration, whether in monetary or non-monetary form. Thus, the CESTAT added, if any benefit accrued to a party that was not in the nature of consideration, the same could not be added to the value of service under section 67 of the Act. 

The CESTAT added that there is no deeming provision for increasing the value of a consideration under section 67 of the Act 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.