Interest-free refundable security deposits are not payable (likely to be payable or required) for service tax as they are not collected in consideration for the provision of a service, rules, The Ahmedabad Bench of the customs, excise & service tax appellate tribunal (CESTAT) .
The case concerns Marwadi Shares & Finance Ltd (appellant or assessed), which provides banking, financial and securities brokerage services. During an audit conducted by the revenue department, it was found that the caller charged annual maintenance fees (AMC) to its customers with demat accounts and paid a service charge on them. However, Marwadi Shares & Finance did not pay any service charge regarding clients who opted for deposit schemes.
Subsequently, show cause notices were issued to the appellant demanding a service tax and proposing a penalty under sections 77 and 78 of the Finance Act 1994 (the Act), which the adjudicative authority lower confirmed.
Against this order, Marwadi Shares & Finance appealed to the Commissioner (Appeals), who dismissed the appeal. Against the Order of the Commissioner (Appeals), the appellant appealed to the headquarters of CESTAT in Ahmedabad.
Marwadi Shares & Finance argued before the CESTAT that no service tax was payable on the interest-free deposits kept by the appellant since the said deposits only served as a guarantee deposit in the event of default by the clients. The Appellant argued that there could be no service tax claim on a refundable deposit.
He argued that the Commissioner (Appeals) could not have upheld the service tax claim by withholding the amount in consideration for the provision of a service. The appellant argued that a refundable deposit is not a “fee” collected by the service provider for providing a service.
Marwadi Shares & Finance added that the security deposit collected was not used by it as payment for the provision of any service. Therefore, the collection of the service tax on these security deposits was contrary to section 67 of the law.
Section 67 of the Act provides for the assessment of taxable services for invoicing of the service tax. Section 67(3) provides that the gross amount billed for a taxable service includes any amount received for the taxable service, whether before, during or after the provision of that service.
Concluding the order in favor of the assessee, CESTAT held that an “interest-free deposit” does not represent the value of any taxable service. The Tribunal observed that the said appellant kept a refundable deposit only as a security deposit in the event of default by the customer.
CESTAT ruled that the amount collected by Marwadi Shares & Finance from its clients was an interest-free refundable deposit that was not collected in respect of a service. The CESTAT thus considered that the interest-free deposit received by the applicant was not taxable since it did not constitute consideration for a service.
The CESTAT considered that under article 67 of the law, a “taxable value” is consideration, whether in monetary or non-monetary form. Thus, the CESTAT added that if an advantage accrued to a party which was not of the nature of the consideration, this could not be added to the value of the service under article 67 of the law.
CESTAT added that there is no deeming provision to increase the value of consideration under section 67 of the Service Charge (Determination of Value) Act or Rules 2006 which resulting. The CESTAT considered that only the consideration received for the service provided is subject to the tax on services and that the notional interest on the deposit taken does not attract the tax on services.