CBEC circular on input service credit - retention money – tax and credit – who is right?
IN yesterday's DDT, we covered the CBEC Circular No 122 Dt 30.4.2010, clarifying the eligibility of CENVAT Credit in cases where the bill amount is reduced by the service receiver for any reason. The relevant para is reproduced again:
(b) In cases where the receiver of service reduces the amount mentioned in the invoice/bill/ challan and makes discounted payment, then it should be taken as final payment towards the provision of service. The mere fact that finally settled amount is less than the amount shown in the invoice does not alter the fact that service charges have been paid and thus the service receiver is entitled to take credit provided he has also paid the amount of service tax, (whether proportionately reduced or the original amount) to the service provider. The invoice would in fact stand amended to that extent. The credit taken would be equivalent to the amount that is paid as service tax.
There is an interesting ancillary to the above situation where the payment is not made full against the invoice. In many contracts, certain percentage of the bill is withheld as retention money which will be released only at the end of the contract. Let us say,
++ A service provider billed an assessee Rs 1,00,000/- plus Rs 10,000/- totalling Rs 1,10,000/-
++ The assessee withheld Rs 5,000/- as retention charges and paid Rs 1,05,000 /- to the client. The assessee takes full credit of Service tax of Rs 10,000/- saying that this Rs 10,000/- service tax was included in the payment of Rs 1 ,05,000 /- made to the client.
++ Department treats the retention money of Rs 5,000/- as cum-tax and disallows the credit of service tax “contained in this Rs 5,000/-” on the ground that the service provider might have paid service tax only by treating the amount of Rs 1,05,000/- as cum-tax as he is not required to pay the service tax until the retention amount is received.
Who is right? Assessee or the Dept? Will the Board clarify?