No Service Tax applicable on deeming notional interest on deposit taken as consideration for providing services

The brief facts of the matter are that the appellant is a registered assessee of Service tax department under the category of “Stock Broker‟s Service, Banking & Financial Services and Business Auxiliary Services. During the course of audit it was observed that the Appellant was charging annual maintenance charges from their clients holding demat account with the appellant and were paying service tax on the said charges. However it was noticed that the Appellant was not paying Service tax in respect of certain category of clients which had opted for “Deposit Schemes”. The Appellant had introduced the four schemes for their customer/demat account holders and collected Rs. 10,000/- , Rs.4000/-, Rs.3000/- , Rs.2500/- and Rs.1250/- as interest free deposit. Initially the Appellant deducted the amount of Rs.1000, Rs.400, Rs.300 , Rs.250 and Rs.125 towards Annual maintenance contract (AMC) fees and paid the service tax. However, for the subsequent periods they stopped paying any service tax in respect of their clients to whom they have undertook the Deposit Scheme. After the Audit, a show cause notices was issued to appellant demanding Service Tax and proposing penalty under Section 76, 77 and 78 of the Act. The matter came to be adjudicated vide respective above Orders-in-Original wherein the lower adjudicating authority confirmed the Service tax liability of the Appellant as mentioned above and also imposed the penalty under Section 76,77 and 78 of Act. Being aggrieved, the appeals were preferred before the Commissioner (Appeals) who vide above respective orders-in-appeal under challenge before him upheld the demand of Service tax and penalties under Section 77 and 78 of the Finance Act. Resultantly the appellant is before this Tribunal.

CESTAT Order:

04. We have gone through the records of the case and considered the submissions made by the Appellant in their grounds of appeal as well as the submissions made at the time of hearing and also the submissions made learned Authorized Representative. The dispute in the present appeals relates to service tax on interest free deposit amount collected by the Appellant from the demat account holders under the Scheme and in lieu of the same Appellant has not collected AMC charges. However, we find that the said “Interest Free Deposit‟ did not represent value of any taxable service. The said deposit amount was kept with the Appellant as security deposit to adjust the amount in case of any default in making payment by the client. The said deposit amount also refundable to client. We find that in the present matter Appellant also produced Certificate issued by the Chartered Accountant who certify that Appellant have not used the amount collected by them as „Interest Free Security Deposit‟ from client for any financial operations or for earning any interest and shown the said amount in Balance Sheet as Current Liability. The amount collected by the Appellant from the clients is in fact an interest free refundable deposit and is not towards any advance for a service. It is, therefore, not taxable.

4.1 We further find that Section 67 provides that taxable value is the consideration whether in monetary or monetary form. Therefore, if any benefit accrues to either party which is not in the nature of consideration agreed upon by the parties, the same is not liable to be added to the value of service in terms of Section 67. Further, there is no deeming provision for increasing the value of consideration either in Section 67 or in the Service Tax (Determination of Value) Rules, 2006 framed thereunder. Here, the deposit is taken for a different purpose. Thus, the said deposit serves a different purpose altogether and it is not a consideration for providing service. The „consideration for service‟ is absent in the present case, therefore, what can be levied to Service Tax is only the consideration received for the service charged and no notional interest on the deposit taken can be levied to tax. There is no provision in Service Tax law for deeming notional interest on deposit taken as a consideration for providing the services. Therefore, in the absence of a provision in law providing for a notional addition to the value/price charged, the question of adding notional interest on the deposit amount as a consideration received for the services rendered does not arise.

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