TMI BlogService Tax credit on Penalty Charges.X X X X Extracts X X X X X X X X Extracts X X X X ..... Sir, When service provider i.e. contractor fails to comply with conditions of work order assigned to him, company raised debit note to him for penalty charges with service tax. Our query is Can contractor take service tax credit as per debit note? Pl explain with rule. Thanks, - Reply By Akash Deep - The Reply = Dear Sir, There is no service tax liability on amount of penalty. You have wrongly charged service tax on such amount. if the contractor avails the credit of such service tax it will be a wrong availment. Payment of penalty can never be treated as input service or input or capital goods. Regards Akash deep - Reply By Mahir S - The Reply = Yes sir, as payment is related to penalty and not related to service tax payment, hence the question of availment of credit does not arise at all , as explained above Therefore, Issuance of debit note is a secondary issue and not required to be taken into consideration. - Reply By CA PRASHANT DUTT - The Reply = If the amount of invoice is renegotiated due to deficient provision of service or due to terms of the contract (for example contingent on the happening or non-happening of a future event), the tax will be payable on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revised amount. This is subject to the excess amount either refunded or a suitable credit note issued to the service receiver. However, concession is not available for bad debts - Reply By CS SANJAY MALHOTRA - The Reply = Friends, Penalties for violation can not considered as Consideration Received under Section 67 of Service Tax Act and hence is not a service . Penalties and Damages are levied for inability of person to meet commitment as agreed upon but in no way be correlated as rendering of service . The above is my submissions and other experts may have divergent view, as it goes around that penalty can be statutory or non statutory. for e.g. late filing of service tax return, contractors penalty as in trailing issue. - Reply By KASTURI SETHI - The Reply = Input service credit can be taken only on Service Tax paid on input service in terms of Rule 2 (l) and Rule 3 of the Cenvat Credit Rules, 2004 and Service Tax charged on penalty amount is in violation of 66 B read Section 67 of the Finance Act and in no way related to input service. I fully agree with views of Sh.Akash Deep, Sh.Mahir S. and Sh.CS Sanjay Malhotra. Nothing has been left untouc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed by them (Experts). No need to touch the issue of debit note as advised by Sh.Mahir S. - Reply By MARIAPPAN GOVINDARAJAN - The Reply = I assume that service tax on penalty is levied as per definition of Section 66E(1)(e) declared service covers ' agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act'. I assume that imposing penalty is to tolerate an act or a situation. I invite the opinions of experts. - Reply By YAGAY AND SUN - The Reply = Dear All, On this scenario, Provision of Section 66E(1)(e) would be applicable. It is now settled legal position. We endorse the very view of Mr. MARIAPPAN GOVINDARAJAN Sir. e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; Regards, YAGAY and SUN (Management, Business and Indirect Tax Consultants) - Reply By Ganeshan Kalyani - The Reply = I agree with Mariappan sir Yagay and Sun views in this respect. - Reply By CS SANJAY MALHOTRA - The Reply = Dear Friends, To reiterate what has been shared earlier to the trailing issue. CONSIDERATION RECEIVED : Def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inition of Service or Declared Service includes consideration received . Important is whether the sort of penalty imposed in a particular situation constitutes consideration or not to be qualified under definition of Service, unless and until the service is specifically defined. Refer to Para 2.3.1 of Education Guide which is reproduced below: 2.3.1 Would imposition of a fine or a penalty for violation of a provision of law be a consideration for the activity of breaking the law making such activity a service ? No . To be a service an activity has to be carried out for a consideration. Therefore fines and penalties which are legal consequences of a person s actions are not in the nature of consideration for an activity . Hence, above is important to conclude the aspect. - Reply By YAGAY AND SUN - The Reply = Dear All, On this matter, two aspects are important; viz, Education Guide of Service Tax is just for education purpose and there is no legal backing of it. Please check the para 1.2 of the education guide. 1.2 What is the aim of this Guide? This guide is aimed at educating the tax payers and the tax administrators on various aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the new concept in order to assist them in gaining better understanding about the new system of taxation.It is clarified at the outset that this guide is merely an educational aid based on a broad understanding of a team of officers of the issues. It is neither a Departmental Circular nor a manual of instructions issued by the Central Board of Excise and Customs. To that extent it does not command the required legal backing to be binding on either side in any manner. The guide is being released purely as a measure of facilitation so that all stakeholders obtain some preliminary understanding of the new issues for smooth transition to the new regime. In this matter, penalty would be treated at par with Liquidity Damage, it is not the result of legal consequences of a person s actions. It is a result of non fulfillment of agreement. Hence, In our view, service tax would be applicable on liquidity damages etc. Regards, YAGAY and SUN (Management, Business and Indirect Tax Consultants) - Reply By Mahir S - The Reply = Sir, The query herein is related to availment of input service credit by the service provider on the penalty charges imposed on on hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. - Reply By KASTURI SETHI - The Reply = Dear Experts, I always relish divergent views on a complicated issue inasmuch as these (divergent) yield error proof conclusions. An expert driver is who drives vehicle on a road which is bumpy or muddy or watery or slippery or full of potholes or crowded otherwise every driver can drive a vehicle on a smooth road. - Reply By KASTURI SETHI - The Reply = Sh.Mahir S., Yes pl. The issue of leviability of Service Tax on penalty charges has been dragged here which was subject of another query raised earlier. - Reply By CS SANJAY MALHOTRA - The Reply = Dear Mahir, Non availability of Input Tax Credit has already been answered appropriately by friends at this platform. Important also is to take into consideration ''whether the Service Tax is leviable on penalty part also or not . If one pays any tax without authority of law, even if the said service is eligible to Input Tax Credit, then also the tax credit is not admissible. Have already mentioned in my initial reply that my friends may have divergent views on levy of service tax on penalty as have seen various arguments on this earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in and against Very interesting and knowledge enriching to have debate on levy of service tax on penalty issue. Above all it can never be concluded that all penalties are chargeable to tax, same goes case wise or else CBEC would have charged service tax even on penalty levied for late submission of return. Would the same be called declared service. Levy of Service tax is not applicable on all penalties, the same has been to seen from respective case wise. It is no way a declared service as the same includes act of Non-Competitive fees (restraining to work for competitors if one pays some consideration). Lets go be clarification issued by CBEC from time to time. Initially to stock exchanges not to levy service tax on delayed payment of charges by brokers, agents. Note Service Tax Circular No. 96/2007 dated 23.08.07 Circular No. 121/26.04.10 for non levy of service tax on penal rent for detention of containers at port. http://www.cbec.gov.in/htdocs-servicetax/st-circulars/st-circulars-2010/st-circ-121-2k10 Circular No. 96/2007 dated 23.08.07 - Reply By MARIAPPAN GOVINDARAJAN - The Reply = Now the department has issued show cause notices for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice tax on surcharge (now it is late fee). - Reply By Mahir S - The Reply = Sanjay ji, Yes. I agree to your point regarding Debate on levy of service tax on the Penalty Issue ; for purpose of Knowledge sharing and enriching. - Reply By surya narayana - The Reply = With due respects to the views expressed by our learned friends, I wish to state that one need to look into the core issues whether the subject penal clause by any chance covered under the Declared services and if the answer is yes, ST is liable to be paid/charged. Regards Surya - Reply By KASTURI SETHI - The Reply = M/S.YAGAY AND SUN, It is correct that CBEC's Education guide has no legal backing but it indicates Board's viewpoint on the issue. Even Board's Circulars have no statutory force but these reflect its viewpoint. Circular No. 121/3/2010-ST dated 26.4.2010 mentioned by Sh.CS Sanjay Malhotra clearly clears the air. Board's circulars are binding on the departmental officers and not on courts. It has been held by so many courts (including the Apex Court). Board will have to stick to its guns unless or until the relevant portion of Education Guide and Board's Circular are eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r amended or withdrawn. - Reply By KASTURI SETHI - The Reply = Sh.Surya Narayana Ji, Whether penal clause is covered in the definition of 'Declared Service' or not ? It is also debatable. Sir, You have used the words, by any chance . It means there is a question mark on the inclusion or exclusion of penal clause in the definition of 'Declared Service'. - Reply By surya narayana - The Reply = Dear Sethi Ji, According to me, the money charged under the penal clause will be covered under one of the Declared services under Section 66E of Finance Act,1994 . For more clarity, I am re-producing the 9 declared services. They are i. renting of immovable property; ii. construction of a complex, building, civil structure or a part thereof iii. temporary transfer or permitting the use or enjoyment of any intellectual property right; iv. Services in relation to information technology software; v. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act ; vi. transfer of goods by without transfer of right to use such goods; vii. activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities in relation to delivery of goods on hire purchase or any system of payment by installments; viii. service portion in the execution of a works contract; ix. service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity. I feel the subject issue might squarely covers under the 5 th one duly highlighted . Since the subject issues is nothing but to tolerate an act or situation, it is liable for service tax. Further, the phrase Declared services has been defined under Sec.65B(22) as any activity carried out by a person for another person for consideration and declared as such under Sec.66E . The above definition also supports my view that the subject act is a declared service and subject to service tax. Thanks Best Regards, Suryanarayana - Reply By YAGAY AND SUN - The Reply = Thanks to ' Surya Sir' , for endorsing our view on this matter. - Reply By vijay kumar - The Reply = Dear All, As far as charging service tax on penalty charges is concerned, I endorse the view that the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny has to pay Service Tax in terms of Section 66E i.e.declared service since it has refrained from an act or tolerated an act or situation by the contractor, provided such a clause exists between the two in the agreement entered by them. It is presumed that such a clause existed whence the company could penalize the contractor. Coming to the point whether the contractor can take the credit of such service tax, I don't think it would be an input service for him in terms of Rule 2(l) of the CCR, 2004 . There was some deficiency of service on his part in providing a particular service to the company, for which he was penalized. Such an activity or deficiency cannot be an input service to provide an output service by him. Thanks Regards. - Reply By MARIAPPAN GOVINDARAJAN - The Reply = The credit cannot be taken against service tax paid on penalty as correctly analyzed by Shri Vijaya Kumar. - Reply By MARIAPPAN GOVINDARAJAN - The Reply = Vide circular dated 20.01.2016 the Department explains the importance of Education Guide released by the Department. In that circular it is indicated - As regards the Education Guide, it has been clearly stated in the Education ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Guide, 2012 that it is merely an educational aid based on a broad understanding of a team of officers on the issues. It is neither a Departmental Circular nor a manual of instructions issued by the Central Board of Excise and Customs. To that extent it does not command the required legal backing to be binding on either side in any manner. The guide was released purely as a measure of facilitation so that all stakeholders could obtain some preliminary understanding of the new issues for smooth transition to the new regime. Hence, Circulars such as the present one would prevail over the Education Guide, 2012. - Reply By Ganeshan Kalyani - The Reply = Healthy discussion and it actually enriches the querist, onlooker and experts as well. Thanks to experts for your efforts. - Reply By KASTURI SETHI - The Reply = Agree with SH.MARIAPPAN GOVINDARAJAN, Sir. I would like to add that even Board's circulars have no statutory force. These also clarify and explain the concept. - Reply By CS SANJAY MALHOTRA - The Reply = Very well said Mr. Kasturi ji and appreciate participation by members on the trailing issue. Circulars may be binding on departmental officers but not on Industry, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or e.g. as none has even quoted Circulars in their Excise Returns/Excise Invoices. Notifications or any act has to be seen judicially also so that the purpose of the act/notification should not be defeated, i.e. why Higher Appellate Authorities / Courts interpretation sometime make the law makers i.e. CBEC/CBDT to accept their findings and amend the law accordingly. - Reply By RAM AVTAR - The Reply = Dear All, As per my understanding this is penalty for non fulfillment of terms and condition of contractor. If this is part of contract like not timely completion of contract and penalty imposed. It would not change the nature of service. Service Will be work contract service and Cenvat is available. Yes if penalty paid for violation of any service tax act and penalty imposed then CENVAT of such penalty is not available. In other way if any award granted to contractor for early completion of work, then service tax liability occurs on work contract head and CENVAT is also available - Service Tax credit on Penalty Charges. - Query Started By: - RAJENDRA KHOMNE Dated:- 23-1-2016 Service Tax - Got 28 Replies - Service Tax - Discussion Forum - Knowledge Sharing, reply post by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an expert, personal opinion Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
