In the situation where the service has been cancelled or not provided and the invoice related to that service has been issued, paid and service tax related to that service has been deposited and the service receiver is asking for a refund there arise two situations:
1. To refund the whole amount of the invoice including service tax to the said service receiver. Or,
2. To refund just the gross amount back to the said service receiver and the rest amount being charged as cancellation charges. [Effect of deduction of Cancellation Chares: In most of the practical situations, the service provider does not refund full amount of advance received from the customer. In other words, while granting refund to the concerned customer, the service provider usually deducts some amount in the name of ‘Cancellation Charges’. The million-dollar question is whether such cancellation charges are subject to Service Tax? Since foregoing Cancellation Charges fall within the ambit of Section 66E (e) of Finance Act, 1994 i.e. Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act, these charges will attract Service Tax at the full rate] [which is 12.36% at present].
In both the situations of surrender and cancellation, the concerned service provider can make adjustment of excess payment of Service Tax in terms of Rule 6(3) of Service Tax Rules, 1994 which is given below for ready reference:
[(3) Where an assessee has issued an invoice, or received any payment, against a service to be provided which is not so provided by him either wholly or partially for any reason,
[or where the amount of invoice is renegotiated due to deficient provision of service, or any terms contained in a contract] the assessee may take the credit of such excess service tax paid by him, if the assessee,
(a) has refunded the payment or part thereof, so received along with the service tax payable thereon for the service to be provided by him to the person from whom it was received;
(b) has issued a credit note for the value of the service tax not so provided to the person to whom such an invoice had been issued.”]
In order to elucidate the issue of adjustment of excess payment of Service Tax following simple example is given:
XYZ Ltd. received an advance[which consists of ` 5,00,000/- together with Service Tax on 25% of 5,00,000/- which works out to ` 15,450/-) towards booking of a flat before issue of a completion certificate from a customer [say Mr. Utkarsh Kapoor ] in April, 2012 =5,15,450/-
Date on which XYZ Ltd. deposited above-mentioned Service Tax to the credit of Central Government [along with its other Service Tax liability] =04.05.2012
Date on which Utkarsh Kapoor applied for cancellation of his booking of flat =16.06.2012
Date on which XYZ Ltd. accepted the application of Utkarsh Kapoor and refunded the amount of 5,15,450/- =25.06.2012
In the above example, it can be appreciated that XYZ Ltd. has received the specified payment [in the form of advance] of ` 5,15,450/-from Utkarsh Kapoor against construction service to be provided which is not so provided by it wholly due to cancellation of booking of flat.
However, XYZ Ltd. has already deposited service tax of ` 15,450/- to the credit of Central Government on 04.05.2012. Thus, XYZ Ltd. can make adjustment of excess payment of Service Tax of Rs .15,450/ after it has refunded amount of ` 5,15,450/- to Utkarsh Kapoor on 25.06.2012. Thus, while discharging its service tax liability for the month of June, 2012 [or in any subsequent month thereafter] XYZ Ltd. can make adjustment of excess payment of Service Tax of Rs .15,450/.
Hope it helped.