vendor quality debit

[Ramakrishnan Seshadri]

Sir,

We are debiting our vendors relating to the poor quality of their product.The vendor will be debited by us under the advice given by the quality department. The materials will not be returned but to make them aware and in future the quality should be improved the vendor will be debited.

Now,we are audited by the caap audit team of central excise. They questioned the quality debit and asked us to debit excise duty for this debit. They are saying that under Clause E under section 66E of the service tax act the excise duty has to be debited.

Could anybody guide us whether excise duty has to be debited for this vendot quality debit.

Awaiting your reply.

Regards,

S.Ramakrishnan.

[YAGAY andSUN]

Dear S Ramakrishnan,

Service Tax Department is rightly asking for payment of service tax on such debit entries under clause E of the Section 66E of the Finance Act, 1994.

You would have to pay the S.T. in this regard.  Please also check the relevant section.

Regards

Team YAGAY  & SUN

(Management & Indirect Tax Consultants)

[Rajagopalan Ranganathan]

Sir,

     When you procure inputs (exciseable goods) on payment of duty and if you found certain quantity of the inputs unfit for use then you can return the inputs to the supplier.  If you availed the credit of duty paid on the inputs then when you return the quantity of input which you found as unfit for use, then proportionate credit has to be paid back by you. since in your case the substandard quantity of inputs are not returned to the supplier, you need not reverse proportionate credit  of central excise duty paid on the inputs.

     Under clause (e) of Section 66 E of finance Act, 1994 agreeing to tolerate an act or a situation is declared as 'Declared Service" which is liable to service tax.  In your case you debit the account of your supplier certain amount to make your vendor aware of the quality if the goods supplied by him and supply good quality goods in future.  The department treat this as declared service and ask you pay the service tax.  However, you cannot pass on the service tax paid by you as credit to your supplier since no tangible service is provided by you. You cannot be treated as service provider and your supplier cannot treated as service receiver.

   

[Madhukar N Hiregange]

If the debits are without return of the items, there is no need to reverse the credits. No need to pay ST on the same as they are in the nature of a forced discount. If one were to take that as a service under Negative list entry it would create chaos. The negative list entry is for items like non compete fee...

[Rajagopalan Ranganathan]

Sir,

       My view is due to the reason that clause (e) of Section 66 E of finance Act, 1994 agreeing to tolerate an act or a situation has declared as 'Declared Service'.  In your case you are debiting your supplier's account certain amount for tolerating the supply of substandard quality of inputs.  Therefore I feel that you have to pay service tax at the rate of 12.36 percent on the amount of debit.

[Ramakrishnan Seshadri]

Dear Sir,

Thanks for the reply. But I could not able to understand the meaning of the section 66E clause E" agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;"

Could anybody explain in detail or through an example.

Thanks & Regards,

S.Ramakrishnan.

[Mahir S]

This is a new entry which was not taxable in erstwhile provisions prior to Finance Act 2012.

In case a company or any other person enters into a non-compete agreement with another person for a consideration, then it would be considered to be a declared service and attract service tax.

This clause covers cases where a transaction may involve rendering of a service or even non-rendering of a service but consideration is involved – an entry where a non-action or non-service event also becomes taxable because consideration is involved - THIS COVERS YOUR CASE.

Examples :-

(a) Non-compete fees for agreeing not to compete.

(b) Compensation on termination of business agreements.

(c) Advance forfeited for cancellation of agreement to provide a service.

(d) Forfeiture of security deposit for damages done by service receiver in course of receiving of services.

(e) Cancellation charges being charged by airlines, hotels etc.

(f) Consideration for non-appearance in a court of law or withdrawal of suit.

(g) Demurrage charges or detention charges.

The above are only examples and one can visualize and imagine any more such actions or inactions which may result in imposition of service tax thereon.

AI Summary

Declared service for tolerating substandard supplies may attract service tax on vendor quality debits unless treated as a forced discount. Vendor quality debits charged for substandard inputs without return may be taxable under the 'agreeing to tolerate' declared service limb as consideration for tolerating a situation; that classification would attract service tax on the debit and preclude passing credit to the supplier. Alternatively, such debits may be treated as forced discounts (non-service), in which case no service tax or reversal of input excise credit would arise. The dispute hinges on whether the debit constitutes consideration for tolerating an act or is merely a commercial adjustment.