Service tax impact on credit note issued against penalty amount hold by customer

[Asked by Guest]

Dear Colleagues,

I have query related to service tax . A service provider has raised an invoice for providing services and also giving an assurance for maintaining the quality of material. He raised an invoice for services say ₹ 2 cr + service tax. Now service recipient has raised a claim of ₹ 10 lac for quality deterioration. Now please suggest us whether service tax is applicable on ₹ 10 lac credit note on not ? If yes is there any case law ?

Regards

Rakesh Mittal

09643356753

AI Summary

Service tax on credit notes can remain taxable, limiting cenvat eligibility and requiring accounting reversal or deduction.
Credit notes issued to adjust penalties for quality deterioration are treated as a reduction of consideration that remains within the taxable ambit of service tax; recipients generally cannot claim cenvat credit on such penal adjustments because of lack of nexus to input services. The practical compliance route is for the service provider to reverse or adjust the tax entry in its accounts and for the parties to reflect the adjustment by deduction from the original payment, with any claim to input credit requiring demonstrable nexus to the taxable output service.