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.

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.