Service tax in respect of construction services

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Querist : Anonymous

Querist : Anonymous (Querist)

13 April 2013 A construction company receives advances for the booking of the blocks. On such advances received he pays service tax. when such booking is cancelled he has to return the amount of advance. Thus if Rs. 100 is to be returned on the cancelled block, he pays Rs. 75 and transferes Rs. 25 to block cancellation account. He will get the credit of service tax on the returned advance of Rs. 75 but will he get the credit of service tax on Rs. 25 also which he did not return but transferred to block cancellation a/c? Block cancellation a/c is in nature of income.

Querist : Anonymous

Querist : Anonymous (Querist)

15 April 2013 Dear Experts,
Please help on my above question as early as possible.

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

24 July 2025 Great question! Here's the explanation for the **service tax credit on advances and block cancellation amounts in construction services**:

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### Situation Recap:

* Construction company receives advances on booking blocks.
* Service tax is paid on those advances.
* When booking is cancelled:

* Rs. 100 advance is to be returned.
* Rs. 75 is actually refunded to the customer (with corresponding reversal of service tax credit).
* Rs. 25 is transferred to "block cancellation account" (treated as income, not refunded).
* The question: **Will the company get CENVAT credit reversal on the Rs. 25 (block cancellation amount) as well?**

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### Service Tax & CENVAT Credit on Advances & Cancellation:

1. **Service Tax on Advances:**

* Service tax liability arises when advance is received.
* CENVAT credit is taken on input services and inputs used for providing the service.

2. **When Advance is Refunded:**

* The service tax paid on the refunded advance must be reversed.
* Corresponding reversal of CENVAT credit related to that refunded service amount is required.

3. **When Amount is Not Refunded But Treated as Income (like Rs. 25 in block cancellation):**

* The Rs. 25 kept as income is **considered as part of the taxable service**.
* Since service tax was paid on the entire advance of Rs. 100, the Rs. 25 is **not refunded** and treated as income.
* **No reversal of CENVAT credit is required on this Rs. 25** because the tax paid on this amount corresponds to actual service income earned by the company.
* In other words, CENVAT credit can be **availed and retained on Rs. 25**, since it forms part of the taxable service consideration.

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### Summary:

| Amount | Treatment for Service Tax & CENVAT Credit |
| ------------------------- | ---------------------------------------------------------- |
| Rs. 75 refunded | Service tax reversed; CENVAT credit on this reversed |
| Rs. 25 retained as income | No reversal of service tax; CENVAT credit on this retained |

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### Key Reference:

* Rule 6 of the CENVAT Credit Rules, 2004 governs credit reversal on refund of advance.
* Since Rs. 25 is retained as income, no refund occurs on that portion, so no reversal needed.

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If you want, I can help draft a formal note or help locate circulars/rulings for your audit or clarification. Want me to do that?

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