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,

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.