Service tax in case of Rent Free premises used for commercial

Dear Members,

One of the partner in the firm providing security services is given his shop to operate its firm business at partner place. There is no rent paid by Firm its partners as per their mutual understanding and consent of partner. Service tax Inspector has raised the query and orally said that the estimated taxable amount on rent of Rs.7 lakhs will attract service tax.

So, my question/ query is -
1. Whether the rent free will be considers under service
2. If yes, then what will be taxable amount on which service will be calculated.
3. Judgments related to above senerio.

plz suggest