The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Delhi, has held that service tax cannot be levied on the notional interest earned on security deposits collected for locker and safe deposit rentals, setting aside a demand of over Rs. 6 lakh raised by the tax department.
The bench of Binu Tamta (Judicial Member) and Hemambika R. Priya (Technical Member) observed that Security deposits serve a protective function, not a revenue-generating one. There is no statutory provision deeming notional interest as consideration for services rendered, and in the absence of such provision, no service tax can be levied.
The appellant, a provider of private locker and safe deposit services, had collected interest-free security deposits from its customers during the period April 2015 to March 2017. The CGST Department issued a show cause notice alleging that the notional interest—calculated at a presumed rate on these security deposits—constituted an “additional consideration” for the service of locker rentals. Citing provisions under Section 65(12) of the Finance Act, the Department classified the activity under “Banking and Other Financial Services” and demanded service tax accordingly.
The adjudicating authority upheld this position and confirmed the demand, which was later sustained in appeal by the Commissioner (Appeals), Jaipur. Aggrieved, the service provider approached CESTAT.
The appellant contended that they had already paid service tax on the actual rent collected and the notional interest could not be treated as taxable. The Tribunal agreed, relying on settled precedent including the 2015 ruling in Murli Realtors Pvt. Ltd. v. CCE, Pune-III, which held that Security deposits are not consideration for services rendered and, in the absence of a specific legal provision, notional interest cannot be taxed.
The Department argued that the notional interest on these deposits constituted an “additional consideration” under “Banking and other Financial Services” as defined in Section 65(12) of the Finance Act, and therefore attracted service tax.
The tribunal held that order confirming the demand was set aside and the appeal was allowed.
Case Details
Case Title: M/s Jyotsna Vaults vs. Commissioner, CGST & Central Excise, Jaipur-I
Case No.: Service Tax Appeal No. 50855 of 2020
Date: July 11, 2025
Counsel for Appellant: Ms. Neha Somani, Chartered Accountant
Counsel for Respondent: Shri Anand Narayan, Authorised Representative
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