Service under Reverse charge mechanism

[Ganeshan Kalyani]

Dear Experts,

I would like to discuss on Service Tax applicability under below given scenario:

Suppose, a service provider (say ‘A’) who as ‘pure agent’ has arranged ‘legal consultancy service‘ from Advocate (say ‘B’) for actual receiver of service (say ‘C’). Here, ‘B’ has raised invoice on ‘A’ who in turn has raised an invoice on ‘C’ with actual cost basis and no profit element. The description on invoice appears as ‘reimbursement of legal consultancy service’. Now, the question is who will have to pay service tax.

Here no doubt ‘legal consultancy service’ is covered under reverse charge mechanism. Primarily 'A' has availed or arranged service from 'B' for 'C'. Hence 'A' is just acting as 'Pure Agent' and ultimate receiver of service is 'C'. Hence in my view 'C' is suppose to pay service tax.

Request you all to share your views in this regard.

Thanks.

[Rajagopalan Ranganathan]

Dear Sri. Kalyani Sir,

I totally agree with your view on the ground the invoice raised by A on C is on the basis of invoice raised by B on A. If the amount demanded by B is the same as the amount demanded by A from C, then we can conclude A is acting as a pur agent of C. In that case it is foe C to pay the service tax on reverse charge mechanism. If A charges any addition amount along with the amount charged by B then B has to pay the service tax on RCM basis and collect it from C through his invoice. This is my view.

[Ganeshan Kalyani]

Thanks for sharing your views to validate my view.

[Rajagopalan Ranganathan]

Dear Sri kalyani Sir,

There were some typographical mistake in my reply dated 09.02.2016. I am furnishing a corrected version of my reply hereunder. The errors are regretted.

"Dear Sri. Kalyani Sir,

I totally agree with your view on the ground the invoice raised by A on C is on the basis of invoice raised by B on A. If the amount demanded by A from C is the same as the amount demanded by B from A, then we can conclude A is acting as a pure agent of C. In that case it is for C to pay the service tax on reverse charge mechanism. If A charges any additional amount along with the amount charged by B then A has to pay the service tax on RCM basis and collect it from C through his invoice. This is my view.

[KASTURI SETHI]

Dear Sirs, For discussion sake

A is providing service to C by way of arranging legal services through B. Arranging or facilitating a provision of a service or a supply of goods between the two or more persons is covered under the definition of "Intermediary services" defined under Rule 2 (f) of Place of Provision Services Rules, 2012. (Erstwhile BAS). If it is so, no RCM is applicable. As per query, A would not charge any profit or additional amount, so we can say that this service is provided by A as an intermediary without any consideration. Why any person would provide intermediary service without any consideration ? Is it charitable ?

[(f) “intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account;]

C & F Agent (say A) provides service as pure agent to the customers (say C) on behalf of the Principal (say B) and pays ST on the amount of commission and not on reimbursable expenses.

In the above cited query (hypothetical) by Sh.Ganeshan Kalyani, Sir, if A provides service with consideration, he would be liable to pay ST under the category of erstwhile BAS (now Other Than Negative List). A is not liable to pay ST because of no consideration. No consideration means no service by A as per definition of service.Otherwise A's service is separately classifiable under "Intermediary"

Should we examine this aspect also ?

[Ganeshan Kalyani]

Thank you so much Sri. Rajagopalan Sir and Sri. Kasturi Sir for valuable reply. Thanks. I have raised this query because I had a thought that if 'A' is primarily availing the service only for the purposes of providing it to 'C' and 'B' is not directly rendering the service to 'C' In this case 'B' and 'C' are the party to the transaction and in no way 'B' is directly providing the service to 'C'. Therefore I guessed that whether in such case 'B' should collect the service tax pay it to the Government. However now after perusing you answers which is nicely explained my doubt is clarified. Thanks.

[KASTURI SETHI]

Dear Sh.Ganeshan Kalyani Ji,

Pl refer to your query dated 10.6.2016. I am late, being busy.

You are right to the extent that installation, repair, erection etc. services are covered under "Works Contract Service". W.e.f. 1.7.12, there are so many services which have been covered under one roof (WCS). These are Commercial or Industrial Construction, Residential Complex, Builders' services, Management, Maintenance or Repair Services, Erection, Installation and Commissioning services etc. In your cross query, so many hidden issues are involved. These are RCM, Classification, methodology of valuation, abatements. For the purpose of valuation, all these services can be separately classified under their erstwhile Chapter/Accounting Codes. You know old accounting codes are still valid not only for statistical analysis but also for clarification on the concept of a particular service, if any doubt arises.

Now first of all for the valuation purpose, we have to resort to Rule 2 A (i) of “Service Tax (Determination of value) Rules, 2006 as amended. Service portion in the execution of a works contract. (valuation without material) and if any assessee cannot determine value under sub-clause (i) and then he has to resort to Rule 2 A (ii) ibid. i.e. Service with material and abatement claim. I mean to say ST can be paid on pure labour on the services mentioned under one roof but subject to the documentary proof of ascertainment of pure labour. If ST is to be paid on pure labour, there is no question of abatement and no question of service with material. Otherwise also it is very cheaper to pay ST on pure labour. Here is an example

Suppose a manufacturer purchases compressor for installation in split A.C. in the factory. Price of compressor is ₹ 10000/- and installation charges are ₹ 500/-.. Everyone knows about installation charges. May be ₹ 700/- Now if the service receiver wants to pay service tax on pure labour charges, he would pay ₹ 98/- only and if he or service provider wants to work under RCM he would pay service tax after availing abatement of 30% (service portion is 70%) as per details given below:-

Service with material ₹ 10700/-

Abatement ₹ 3210/-

Taxable ₹ 7500/-

ST payable ₹ 1050/- (Rs.525 +525). 50% each. On pure labour ST is far less. In case any assessee can bifurcate value of material and pure labour charges and pay ST on pure labour charges, the department cannot object. It is an option for the assessee to either to avail abatement or not. If any assessee is unable to segregate material and pure labour e.g. construction service, he will have option to avail abatement and forgo cenvat credit. You know pure labour cannot be classified under works contract service.

If any assessee pays ST on pure labour, his service will be classified under respective head and not under WCS. No party can avail the benefit of RCM by deliberately mixing value of material and pure labour. We are talking about the valuation of service under WCS and out of WCS.

The whole revolves around valuation aspect. Hence we have talked on valuation and remaining points still to be touched, if still required.

Any further query ? Welcome.

[Ganeshan Kalyani]

Sir I have got clarity from your reply. However just a little bit of discussion more. If suppose a supplier supplies machines and he does the installation and commission also. But while billing he does charge only for the sale of machinery and the installation charges are included in the price of machinery itself. The machinery cost is offered for VAT but service tax ??? Service is there no about but including in tn cost.

[Ganeshan Kalyani]

In my above post will the department ask the assesse to apply valuation rule and pay service tax or since the price charge is shown on invoice as purchase of machinery the department will not object the VAT charged and consider as mere purchase of machinery. Please give your view in this regard.

[KASTURI SETHI]

Sh.Ganeshan Kalyani ji,

(Purpose of this posting is exchange of views and enrichment of knowledge for all of us )

Sir, This reminisces me a case during my posting as R.O. in the year 2003. One unit was manufacturing dutiable and exempted goods. Exempted goods were much more than dutiable goods. The party was not in a position to maintain separate records of common inputs and as per erstwhile Rule 57CC , they were required to pay an amount of 8 % or 10 % of the value of clearances of exempted goods e.g. Credit of ₹ 1000/- on inputs was availed and SCN was issued for Rs.one lakhs. (I do not remember the exact ratio but I remember the issue.) The demand was confirmed by A.C. and upheld by the Commissioner (Appeals) as SCN was issued as per Central Excise Rules. The party filed appeal with CESTAT and CESTAT decided the case in favour of the assessee.The judge held as, "I am amused with this case. It is a matter of common sense ---------------." I have read this order myself as unit was in my jurisdiction. Thereafter, the department accepted the CESTAT's order because practically the confirmation of the demand was wrong. Gross injustice was done by confirming the demand by A.C. and upholding by the Commissioner (Appeals) whereas legally it was correct. I mean to say sometimes it is not practically feasible to go by the law. Such like situation indicates flaw in the law.

Now we talk on the the present issue, if the value of machinery includes installation charges also as per law, it would be covered under Works Contract Service and would be eligible for the benefit of RCM and abatement.But practically seller and purchaser of machine both knows very well about the price of machine and installation charges of machine. Installation charges are always far less than purchase price of machine. Installation charges stand nowhere as compared to the purchase price. If any party is unable to bifurcate or cannot maintain separate records (in the above cited example), it does not mean that the assessee should be punished with the weapon of law. After all laws have been framed for the welfare of the people and not for harassment. So common sense or knowledge should also prevail in practical situation. In the subject cited you, the party would pay more ST, if they do not bifurcate knowingly.

A few case laws are appended below. In these cases, erection commissioning and installation charges were included in the value of machine and CE duty was paid on the whole amount and demand of ST and imposition of penalty was set aside. The department can not recover Excise duty and ST both. Since Central Excise duty was paid on erection, commissioning & installation charges, because they could not bifurcate value & labour charges, demand of ST was set aside and accepted by the department. No further appeal was filed with High Court.

AllENGERS MEDICAL SYSTEMS LTD 2012(277) ELT 184 (Tri.Delhi), 2009 (014) STR 235 (Tri. Delhi), = 2008 (10) TMI 150 - CESTAT NEW DELHI

ALIDHARA TEXSPIN ENGINEERS 2010 (20) STR 315 (Tri-AHMD) = 2010 (8) TMI 145 - CESTAT, AHMEDABAD

In a nutshell, if one can bifurcate, must bifurcate. If not possible by any means then would fall under WCS. If it is proved that any assessee has availed the benefit of RCM and abatement with in intent to evade ST, he is liable to penal action. So much depends upon the construction of agreement between Service Provider and Service Recipient. Invoice should also be backed by terms and conditions of the agreement.

[Ganeshan Kalyani]

Just for discussion purpose. In the last Budget penalty provision was amended to provide for willful evasion of tax and unwilfull evasion of tax. A matter of debate is department official will be pro department and will state that assesse is knowing the input service tax credit definition and therfore have willfully taken the inadmissible credit. Whereas assesse content that it was an inadvertent mistake and upon self ascertainment or by pointing out the mistake by the department auditor it ws reversed. But question here is how one can prove the intension of a person. Iy sometimes becomes a scene of a movie where the hero has to that his intention is not wrong when he is spotted by his girlfriend with another girl talking with smile. In one of case handled by me I have been trying to prove that the credit wrong taken was unintentional but department has issued demand order and I had to appeal for. Any such situations you would have gone through and any suitable solutions to assesse you would like to share. Please share. Thanks.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

Sir, First of all I agree with you. There is solution but one will have labour hard to find case laws..I am of the view that the party's records would speak. In case, the irregularly availed credit is reversed by the party on his own (i.e. without detection by the department whether pointed out by Audit Wing or Preventive or Range Officer) along with interest, it would be treated as a case bona fide mistake in trhe eyes of law as well as the department.If the party reverses the irregularly availed credit on being pointed out by the department, it would be treated as case of mala fide intention whatever may be the background and would attract penalty under Section 78 or Section 11 AC or Rule 15. The department would allege as under:-

"Had the department not unearthed this lapse, it would have remained undetected and Govt suffered huge loss of revenue." Only reversal of credit on his own can save the assessee from the clutches of penalty.Otherwise there is no parameter which could prove that certain entries were made intentionally or unintentionally. Judegements to this effect can be traced out to rescue any assessee.

[Ganeshan Kalyani]

Thank you so much Sri Kasturi Sir for sharing your valuable knowledge to clarify my doubts / query. I have got a satisfactory reply from you Sir. Thanks a tonne.

AI Summary

Reverse charge liability: ultimate recipient bears tax when intermediary acts as a pure agent without markup. When an intermediary invoices an ultimate recipient at the exact amount charged by the service provider with no markup and as a reimbursement, the intermediary is a pure agent and the reverse charge mechanism makes the ultimate recipient liable for service tax. If the intermediary adds any additional consideration, the intermediary's supply becomes taxable and the intermediary must account for service tax. Classification as intermediary services or works-contract-related supply, contractual terms, invoice particulars, and valuation (pure labour vs abatement) determine the correct tax incidence and potential penalty exposure.