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,

[YAGAY and SUN]

Thanks to 'Surya Sir', for endorsing our view on this matter.

[Vijay kumar]

Dear All,

As far as charging service tax on penalty charges is concerned, I endorse the view that the company 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.

[DR.MARIAPPAN GOVINDARAJAN]

The credit cannot be taken against service tax paid on penalty as correctly analyzed by Shri Vijaya Kumar.

[DR.MARIAPPAN GOVINDARAJAN]

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 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.

[Ganeshan Kalyani]

Healthy discussion and it actually enriches the querist, onlooker and experts as well. Thanks to experts for your efforts.

[KASTURI SETHI]

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.

[CSSANJAY MALHOTRA]

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, for 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.

[RAM AVTAR]

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

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.