Service Tax under reverse charge

[Vinay Sharma]

Dear Sir,

A partnership firm received bills from manpower supplier indicating 75% service tax liability of the service recipient. The partnership firm deposited this tax and availed service tax input credit for the same.

Later on the error came to notice that partnership firm was not liable to pay service tax under reverse charge. In fact service provider was liable to pay service tax.

Please answer the following questions.

1- Can department challenge input tax credit taken by partnership firm.If yes, how to defend.

2- If Department issues notice to service provider, he obtains a certificate from service receiver to the effect that service tax has been paid under reverse charge by the service recipient.Will it be regarded as valid discharge of his liability.

Kindly explain with case laws if any.

[CA ombir Singh Panwar]

service tax is levied under Section 66B[1] of the Finance Act, 1994 as amended up to date. Section 68(1)[2] confers liability to pay service tax on service provider and section 68(2)[3], which has overriding effect over section 68(1), confers liability to pay service tax on the receiver of such taxable service as notified by Central Government. The reverse charge mechanism (RCM) was first introduced effectively from 01-01-2005 vide Notification No. 36/2004-ST dt. 31-12-2004 read with Rule 2(1)(d) of Service Tax Rules, 1994. With effect from 01-07-1012 a new mechanism of reverse charge (RCM) and partial reverse charge or joint charge (PRCM / JCM) was introduced with the introduction of negative list regime of service tax. Key concepts of reverse/partial charge mechanism are;

1. Applicability of RCM/PRCM is dependent on the status & location of Service Receiver (SR) and Service Provider (SP) and taxability of service. RCM does not apply on non-taxable and exempted services but applies on abated services and where value is determined by valuation rules.

2. No threshold exemption of ₹ 10 lacs is available to Service Receiver (SR) as this exemption is available to Service Providers only. (refer NN 33/2012-St dt. 20-06-2012)

3. Service Receiver is liable to pay service tax under this mechanism from very first invoice received under this category. It means SR is liable to pay ST even when SP is within the ambit exemption limit under NN 33/2012-ST.

4. This service tax liability has to be met in cash i.e. no Cenvat Credit facility is available to meet out this liability as Cenvat Credit facility is available for output services only while it will be input service for SR. Rule 2(p) of Cenvat Credit Rules, 2004 (as amended by NN 28/2012-CE (NT) dt. 20-06-2012, the term output service means any service provided by SP located in taxable territory but shall not include a service; (a) Specified in section 66D of the Finance Act, 1994, or (b) Where whole of ST liability is of SR i.e recipient of service. As a result, who is engaged in providing taxable services falling under full RCM, will not be able to take Cenvat Credit of ED & ST in respect of ‘input’/’capital goods’ and ‘input services’ respectively.

5. Service Receiver is liable to discharge service tax liability under Rule 7 of Point of Taxation Rules, 2011 (NN 18/2011-ST as amended by NN 25/2011-ST, NN 41/2011-ST, NN 4/2012-ST and NN 37/2012-ST)

6. In case of Service Providers (SP) rendering the services all of which falls within the ambit of complete reverse charge mechanism; he cannot avail Cenvat credit of input or input services. But, Service Receiver (SR) who is paying service tax under RCM can avail Cenvat credit as per Rule 4(7) of CCR, 2004 for any output service [refer Rule 3(4)(e) of CCR, 2004] on the basis of challan evidencing payment of ST [refer Rule 9(1)(e) inserted by NN 18/2012-CE (NT)].

[Mahir S]

Sir,

If it is a one to one case of payment and availment of credit by partnership firm and one to one case for the service provider for paying duty at 75% under rcm, then you may defend the case accordingly.

[YAGAY andSUN]

Dear All,

We are unable to understand both replies shared by IDT Experts. Please be specific.

Regards

YAGAY and SUN

(Management, Business & Indirect Tax Consultants)

[Rajagopalan Ranganathan]

Sir,

Prior to 1.4.2015 in respect of man power supply service 25% of the service tax is to be paid by the service provider and 75% of the service tax is to be paid by the service receiver under reverse charge mechanism. However liability for payment of taxes cannot be fastened on another person through contract or agreement by the person who is actually liable to pay the tax. If your service provider is liable to pay 100% of the tax the Department will collect the remaining 75% from your service provider. The Department will also object taking credit of 75% of service tax paid by you on the ground that what you paid is service tax and it is only a deposit which can be claimed from the Department as a refund. Bur before filing the refund claim you have reverse the credit taken by you and then only you can claim the refund.

[Tarun Agarwalla]

Dear Sir

this is a case where the tax has been paid where the liability to pay does not casted. hence the said payment is not as per law and it need to be applied for refund. taking Cenvat credit is the rarest matter.

thanks

[Akash Deep]

Dear Bhuvesh,

Under the law, in the situation described by you, the liability to discharge service tax liability is on the service provider and to the extent of 100%. So department will issue notice to service provider if any dispute arise. certificate by service receiver that he has discharged liability on behalf of service provider, will serve no purposes and any such certificate would be patently against the express provision of section 69. recently Hon'ble High Court of Delhi in case of DTC held that what can be shifted by agreement between parties is the burden of tax and not liability to pay tax to the central government fasted under Finance Act, 1994. Being so. discharge of service tax liability by service receiver on behalf of service provider can never be treated as a valid discharge of service tax liability.

as service receiver has wrongly paid service tax, refund claim for the same has to be filed, Rule 6(3) of Service tax rules, is not applicable in this situation. you can not treat as the amount paid as credit in your account.

 

[Alpa Shah]

Please refer case of Bajaj Allianz General Insurance Co. Ltd. Vs. Commissioner of Central Excise, Pune-III [2014-TIOL-1540- CESTAT-MUM = 2014 (8) TMI 787 - CESTAT MUMBAI]. It is held that Cenvat Credit cannot be denied of service tax wrongly paid
under reverse charge.

AI Summary

Reverse charge liability: service receiver cannot validly discharge provider's statutory tax obligation by payment; refund remedy required. Liability under the reverse charge mechanism depends on party status and service taxability; recipients must pay in cash and cannot rely on provider thresholds. Payment by a recipient where the provider is statutorily liable does not extinguish the provider's obligation; such payments require refund or adjustment procedures and credit reversal where the recipient wrongly availed input credit. Credit entitlement differs: recipients lawfully paying under reverse charge may claim credit for output services on proof of payment, while providers wholly under reverse charge cannot claim input or input service credit.