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The notional interest has to be considered as part of value of supply of service

Authority for Advance Ruling — Renting of Commercial Property – The applicant planned for engaging in the business of renting of commercial property on monthly rents and allied business. They intended to enter in to a contractual agreement of renting of immovable property with an Educational Institution in Bangalore. The Contract is on the basis of the reserved monthly rent of Rs.1.50 lakhs or Annual Rent of Rs.18.00 Lakhs and also refundable caution deposit of Rs.500 Lakhs, which shall be returned without interest on the termination of the tenancy. Further, since the applicant is required as per law to refund the advance caution deposit, the same does not in anyway determine the quantum of rent. The applicant do not have any taxable activity other than the activity of leasing out Immovable Property commercial spaces and hence they are at present claiming exemption since their turnover is less than Rs.20 Lakhs. The applicant sought an advance ruling (i) for the purpose of arriving at the value of rental income, whether the applicant can seek deduction of property taxes and other statutory levies; (ii) for the purposes of arriving at total income from rental, whether notional interest on the security deposit should be taken into consideration; (iii) whether the applicant is entitled for exemption of tax under the general exemption of Rs.20 lakhs.
Held that:- The Hon’ble Authority for Advance Ruling held that the applicant can’t deduct the property taxes and other statutory levies for the purpose of arriving at the value of rental income. 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 supply of RIS service i.e. monthly rent. The applicant is entitled for exemption of tax under the general exemption of Rs.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.—Midcon Polymers Pvt. Ltd., In Re… [2020] 28 TUD Online 041 (AAR-Karnataka)