CHEQUE RETURN PENALTY SERVICE TAX

[george thomas]

Dear Sir

Our Company is engaged in Trading of Edible oil by appointing CFA OR Trade Associate .After the sales we are receiving Cheque payments .As per the Agreement if cheque is bounced more than 2 times we have the right to collect cheque return penalty charges also along with the invoice amount. Plz clarify whether service tax liability is there for the Cheque Return Penalty charges collected from the party.This charges is a part of the sale invoice amount and not providing any service

[Ganeshan Kalyani]

Service tax is not applicable on penalty as it does not amounts to service.

[KASTURI SETHI]

You have yourself said that penalty charges collected are part of sale invoice.Hence no question of applicability of ST. No service has been provided. Agreed with Sh.Ganeshan Kalyani ji.

[YAGAY and SUN]

According to us Section 66 E (e)agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; would be applicable on this transaction.

[KASTURI SETHI]

M/s. YAGAY AND SUN,

Dear Sirs,

With due respect, I differ with you on this issue. In this case, penalty charges recovered due to bouncing of cheque pertain to sale of edible oil and not to providing taxable service. CFA is not in picture. Had the penalty charges pertained to taxable service, Section 66 (E)(e) would have been applicable.

This is my view and views of other experts are also solicited.

[Ganeshan Kalyani]

The subject under issue is very debatable. I remember in recent past issue there had been a strong discussion on the subject. However that issue issue is slightly different from this one. Thanks.

[KASTURI SETHI]

Difference of opinion does not mean lack of knowledge. Difference of opinion leads to healthy discussion and thus, in turn, healthy discussion yields more knowledge and clarity on the issue. So every discussion should not remain inconclusive.

AI Summary

Service tax on cheque return penalty: treatment hinges on whether penalty is sale consideration or a taxable service.
Whether cheque return penalty charges collected with a sale invoice constitute a taxable service or form part of the sale consideration. The prevailing view is that such penalty charges, when included in the sales invoice for goods, are incidental to the sale and not a taxable service; involvement of a CFA or agent does not convert the penalty into a service. A counterview suggests the transaction could be characterised as a forbearance obligation attracting tax, but others reject that characterisation on these facts.