Input service credit taken on retained amount of service providers -reg

[vinay wakde]

We have retained 10% amount from some of our service providers as performance retention as per the contract. However, we have taken full credit as indicated in the invoices. We have received a show cause notice from the Department for not making full payments to the service providers on the date of taking credit of Service Tax. In our reply to show cause notice, we rely upon CBEC Circular No 122/03/2010-ST dated 30-04-2010 and Hindustan Zinc Ltd V/S Commissioner of Central Excise Jaipur II, reported in 2011(21) STR 600(Tri-Del) - 2010 (12) TMI 342 - CESTAT, NEW DELHI

Is there any CESTAT judgement latest reported in E.L.T. or any clarification from C.B.E.C. in the matter.

Regards,

VINAY

[Suryanarayana Sathineni]

Dear Friend,

Can u please elaborate your query under what term/condition of the contract you have retained 10% of ST and when that retained amount would be paid back. Is it the service Tax amount or 10% of the service amount or total Bill amount?

Best Regards

Suryanarayana

[vinay wakde]

In certain cases, a small portion of the basic amount payable to service provider is retained or held back with us in order to ensure that the service provider renders a quality service and also to ensure that he attends to complaints without any delay and makes good the deficiency in the service provided by him. Such retained amount is normally released to the service provider within a period of three to six months from the date of original payment made to him. In these types of cases, a portion of the basic amount is retained and the balance amount is paid to the service provider including the entire service tax charged by the service provider. In other words no amount of service tax is retained as shown in the bill of service provider. We are availing the Cenvat credit of service tax only after payment of service tax to the service provider.

Regards,

VINAY

[Ganeshan Kalyani]

Basically when payment is made by retaining some amount there is no such bifurcation that tax is paid and the basic is retained. How will you justify the working. Ideally when payment is not made within three months then cenvat credit taken should be reversed and can be taken again on payment to vendor.

I think interest will be the hit to you. Thanks

[KASTURI SETHI]

Sh.Vinay Wakde Ji,

I agree with Sh.Ganeshan Kalyani, Sir. He has rightly analysed the situation. It is very simple to understand that you cannot avail full credit while retaining Service Tax portion with yourself. Choose the right path which is smooth and doubt-free and confusion-free. Each case law has different facts.

[Suryanarayana Sathineni]

Dear Friends,

I still fells that if the terms of the contract clearly indicates that little portion of the amount of service to be retained to safeguard the interest of the company in getting the quality service and to rectify the defective works etc., then absolutely the company can take credit of the full ST being paid to the service Provider.

Otherwise, if the company is able to prove that the amount detained is only from the basic service amount then there should not be any problem in taking the service tax credit.

Best Regards

Suryanarayana

[KASTURI SETHI]

Sh.Vinay Wakde Ji,

I agree with the views of Sh.Surya Narayana, Sir, especially with second para.This para is substance of his views. If party is able to prove that amount retained is part of value of Service Tax excluding the element of ST, there is no revenue loss in any form.

[vinay wakde]

Our contract clearly indicates that 10% amount shall be retained by the company as performance retention from the service providers and the said amount shall be released to the service provider only after a period of three to six months from completion of contract.

Regards,

VINAY

[KASTURI SETHI]

Sh.Vinay Ji,

If there is clause to this extent in the contract, that is in your favour. It is a plus point. Despite this clause in the contract, ST must not be the part of 10 % of the amount retained by you. After excluding the ST component from 10% of the total amount, the remaining balance may remain with you.No object to Govt.

[vinay wakde]

Shri Kasturiji,

We are submitting photo copy contracts entered with few service providers at the time of personal hearing wherein, it is mentioned that 10% amount shall be deducted and kept as retention money towards job and its quality performance. The said retained amount shall be refunded within six months after completion of contract period and no interest shall be payable on retention money.

Once again thanks for instant guidance in the matter.

With regards,

VINAY

[Ganeshan Kalyani]

Sir you may update us the result of your proceedings to enrich our knowledge, because litigation is like Cricket match I mean very challenging and interesting...

AI Summary

Service tax credit rules: credit depends on whether retained contract sums exclude tax and whether tax was actually paid to supplier. Availing service tax/Cenvat credit while retaining a portion of contract payment depends on whether the retention is contractually confined to the service value exclusive of tax and whether the supplier was actually paid the service tax; absent payment within the prescribed period credit should be reversed until the tax is paid, potentially attracting interest, and factual proof in the contract and payment records is determinative.