The Hon’ble AAAR Karnataka, in the matter of M/s. Midcon Polymers Pvt. Ltd. [Order No. KAR/AAAR/01/2020-21, dated January 11, 2021] held that the property tax paid to the Municipal Authority cannot be deducted from the monthly rental income for arriving at the value of supply of the renting service. However, the notional interest on the security deposit shall not be taken into consideration for the purposes of arriving at total rental income.
M/s Midcon Polymers Pvt Ltd. (“Appellant”) is engaged in the business of renting of commercial property, who intends to enter into commercial agreement with educational institution in Bangalore, wherein the premise is rented out for a monthly rent. The Appellant also collects a caution deposit/security deposit from the prospective tenant which is refundable without interest at the time of termination of the rental agreement. In addition, the Appellant discharges the statutory taxes levied by the Municipal authority i.e., Bruhat Bengaluru Mahanagara Palike (“BBMP”) on the property.
The present appeal has been filed by Appellant against the order of the Hon’ble AAR, Karnataka in Order No. KAR ADRG 48/2020, dated September 16, 2020, wherein it was held that the Appellant cannot deduct the property taxes and other statutory levies for the purpose of arriving at the value of rental income. Further, the notional interest on the security deposit shall be taken into consideration for the purposes of arriving at total income from rental, only if it influences the value of supply of monthly rent. Furthermore, the Appellant is entitled for exemption of tax under the general exemption of INR 20 lakhs, subject to the condition that their annual turnover which includes monthly rent and notional interest (if it influences the value of supply), does not exceed the threshold limit.
1. Whether the property tax paid by the Appellant to the Municipal Authority can be deducted from the monthly rental income received?
2. Whether the notional interest on the security deposit is to be included for the purpose of calculating the total rental income?
The Hon’ble AAAR Karnataka, in Order No. KAR/AAAR/01/2020-21, dated January 11, 2021 held as under:
Section 2(31) of the CGST Act:
“Consideration” in relation to the supply of goods or services includes-
(a) any payment made or to be made, whether in money or otherwise, in respect of in response to, or for the inducement of the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, whether or not voluntary, in respect of in response to, or for the inducement of the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Provided that a deposit, given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies the deposit as consideration for the said supply”
Section 7(1)(a) of the CGST Act:
“Scope of supply.
(1) For the purposes of this Act, the expression “supply” includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”
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