Service Tax credit on Penalty Charges.

[RAJENDRA KHOMNE]

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,

[Akash Deep]

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

[Mahir S]

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.

[CA PRASHANT DUTT]

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 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

[CSSANJAY MALHOTRA]

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.

[KASTURI SETHI]

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 untouched by them (Experts). No need to touch the issue of debit note as advised by Sh.Mahir S.

[DR.MARIAPPAN GOVINDARAJAN]

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.

[YAGAY andSUN]

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)

[Ganeshan Kalyani]

I agree with Mariappan sir & Yagay and Sun views in this respect.

[CSSANJAY MALHOTRA]

Dear Friends,

To reiterate what has been shared earlier to the trailing issue.

"CONSIDERATION RECEIVED" : Definition 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.

[YAGAY andSUN]

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?

1. This guide is aimed at educating the tax payers and the tax administrators on various aspects 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)

[Mahir S]

Sir,

The query herein is related to availment of input service credit by the service provider on the penalty charges imposed on on him.

[KASTURI SETHI]

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.

[KASTURI SETHI]

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.

[CSSANJAY MALHOTRA]

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 "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

[DR.MARIAPPAN GOVINDARAJAN]

Now the department has issued show cause notices for service tax on surcharge (now it is late fee).

[Mahir S]

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.

[Suryanarayana Sathineni]

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

[KASTURI SETHI]

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 either amended or withdrawn.

[KASTURI SETHI]

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'.

[Suryanarayana Sathineni]

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. activities 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

 

AI Summary

Service tax on penalty charges: levy depends on whether the charge is a declared service; credit usually disallowed. Penalty or liquidated-damage amounts for breach of contract are generally not 'consideration' for a service and thus not taxable; alternatively, such charges may fall within Section 66E(1)(e) as a declared service if the contractual clause evidences agreeing to tolerate or refrain from an act. Service tax paid on penalty is ordinarily not admissible as Cenvat/input credit under Rule 2(l) and Rule 3, and tax paid without authority of law cannot be credited; the question is fact-specific and dependent on contractual wording and departmental guidance.