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.

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.