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.

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.