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'No drawback available if imported goods are used and re-exported'

Service tax will be payable on liquidated damages or penalty for late delivery or non-delivery of goods

T N C Rajagopalan 

Tax

We had imported a testing machine more than two years ago. It has not been functioning well. We had taken this up with the supplier, who gave us a free replacement. We have cleared the replacement goods on duty payment. Now, we want to send back the defective machine. Can we get drawback of the duty paid? 

Since you have used the goods and are re-exporting the goods after 18 months from the date of import, you will not get any drawback, as per notification no. 19/65-Cus dated February 6, 1965, as amended from time to time.
 
We have received a show cause notice asking us to pay on penalty for late delivery of goods and non-delivery of goods as per contractual obligations. Is this correct?

Apparently, the government relies on Section 66E (e) of Finance Act, 1994, which says that “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” shall constitute a declared service — i.e. any activity carried out by a person for another person for a consideration. It appears that penalty is being construed as a consideration for tolerating the act of late delivery or non-delivery. S.No. 57 of the notification 25/2012-ST dated June 20, 2012 exempts the tax on “services provided by Government or a local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Government or the local authority under such contract”. CBEC circular no. 192/02/2016-S.T., dated April 13, 2016, also clarifies this point. So, the official view seems to be that in contracts between parties other than government or local authority, will be payable on liquidated damages or penalty for late delivery or non-delivery of goods or services. I think there is scope to contest that view on the grounds that penalty or liquidated damages comes into play when one party refuses to tolerate late delivery or non-delivery by the other party and thus, there is no service element and consequently, no question of tax. 

We have opted to issue digitally signed invoices in accordance with Notification No. 18/2015-Central Excise (N.T.), dated July 6, 2015. Some of our customers want manually signed invoices as they do not have the requisite information technology infrastructure to accept or receive digitally signed invoices electronically. Can we issue manually signed invoices?

Yes. The CBEC Circular no. 1038/26/2016-CX, dated July 19, 2016, clarifies that a manufacturer or a service provider who opts to issue invoices authenticated by digital signature may print a copy of such invoice and sign them manually and forward the same to such customers who are unable to accept or receive the digitally signed invoices. Such invoices in effect would be authenticated by two signatures, digital signature as well as manual signature and would be considered to be in conformity with Rule 11 of Central Excise Rules, 2002 or Rule 4A, 4B and 4C of the Rules, 1994.

Business Standard invites readers’ queries related to excise, VAT and exim policy. 
You can write to us at smechat@bsmail.in

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'No drawback available if imported goods are used and re-exported'

Service tax will be payable on liquidated damages or penalty for late delivery or non-delivery of goods

Service tax will be payable on liquidated damages or penalty for late delivery or non-delivery of goods
We had imported a testing machine more than two years ago. It has not been functioning well. We had taken this up with the supplier, who gave us a free replacement. We have cleared the replacement goods on duty payment. Now, we want to send back the defective machine. Can we get drawback of the duty paid? 

Since you have used the goods and are re-exporting the goods after 18 months from the date of import, you will not get any drawback, as per notification no. 19/65-Cus dated February 6, 1965, as amended from time to time.
 
We have received a show cause notice asking us to pay on penalty for late delivery of goods and non-delivery of goods as per contractual obligations. Is this correct?

Apparently, the government relies on Section 66E (e) of Finance Act, 1994, which says that “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” shall constitute a declared service — i.e. any activity carried out by a person for another person for a consideration. It appears that penalty is being construed as a consideration for tolerating the act of late delivery or non-delivery. S.No. 57 of the notification 25/2012-ST dated June 20, 2012 exempts the tax on “services provided by Government or a local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Government or the local authority under such contract”. CBEC circular no. 192/02/2016-S.T., dated April 13, 2016, also clarifies this point. So, the official view seems to be that in contracts between parties other than government or local authority, will be payable on liquidated damages or penalty for late delivery or non-delivery of goods or services. I think there is scope to contest that view on the grounds that penalty or liquidated damages comes into play when one party refuses to tolerate late delivery or non-delivery by the other party and thus, there is no service element and consequently, no question of tax. 

We have opted to issue digitally signed invoices in accordance with Notification No. 18/2015-Central Excise (N.T.), dated July 6, 2015. Some of our customers want manually signed invoices as they do not have the requisite information technology infrastructure to accept or receive digitally signed invoices electronically. Can we issue manually signed invoices?

Yes. The CBEC Circular no. 1038/26/2016-CX, dated July 19, 2016, clarifies that a manufacturer or a service provider who opts to issue invoices authenticated by digital signature may print a copy of such invoice and sign them manually and forward the same to such customers who are unable to accept or receive the digitally signed invoices. Such invoices in effect would be authenticated by two signatures, digital signature as well as manual signature and would be considered to be in conformity with Rule 11 of Central Excise Rules, 2002 or Rule 4A, 4B and 4C of the Rules, 1994.

Business Standard invites readers’ queries related to excise, VAT and exim policy. 
You can write to us at smechat@bsmail.in
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Business Standard
177 22

'No drawback available if imported goods are used and re-exported'

Service tax will be payable on liquidated damages or penalty for late delivery or non-delivery of goods

We had imported a testing machine more than two years ago. It has not been functioning well. We had taken this up with the supplier, who gave us a free replacement. We have cleared the replacement goods on duty payment. Now, we want to send back the defective machine. Can we get drawback of the duty paid? 

Since you have used the goods and are re-exporting the goods after 18 months from the date of import, you will not get any drawback, as per notification no. 19/65-Cus dated February 6, 1965, as amended from time to time.
 
We have received a show cause notice asking us to pay on penalty for late delivery of goods and non-delivery of goods as per contractual obligations. Is this correct?

Apparently, the government relies on Section 66E (e) of Finance Act, 1994, which says that “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” shall constitute a declared service — i.e. any activity carried out by a person for another person for a consideration. It appears that penalty is being construed as a consideration for tolerating the act of late delivery or non-delivery. S.No. 57 of the notification 25/2012-ST dated June 20, 2012 exempts the tax on “services provided by Government or a local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to the Government or the local authority under such contract”. CBEC circular no. 192/02/2016-S.T., dated April 13, 2016, also clarifies this point. So, the official view seems to be that in contracts between parties other than government or local authority, will be payable on liquidated damages or penalty for late delivery or non-delivery of goods or services. I think there is scope to contest that view on the grounds that penalty or liquidated damages comes into play when one party refuses to tolerate late delivery or non-delivery by the other party and thus, there is no service element and consequently, no question of tax. 

We have opted to issue digitally signed invoices in accordance with Notification No. 18/2015-Central Excise (N.T.), dated July 6, 2015. Some of our customers want manually signed invoices as they do not have the requisite information technology infrastructure to accept or receive digitally signed invoices electronically. Can we issue manually signed invoices?

Yes. The CBEC Circular no. 1038/26/2016-CX, dated July 19, 2016, clarifies that a manufacturer or a service provider who opts to issue invoices authenticated by digital signature may print a copy of such invoice and sign them manually and forward the same to such customers who are unable to accept or receive the digitally signed invoices. Such invoices in effect would be authenticated by two signatures, digital signature as well as manual signature and would be considered to be in conformity with Rule 11 of Central Excise Rules, 2002 or Rule 4A, 4B and 4C of the Rules, 1994.

Business Standard invites readers’ queries related to excise, VAT and exim policy. 
You can write to us at smechat@bsmail.in

image
Business Standard
177 22