Liability To Pay Service Tax Under Reverse Charge – Whether Tax Is Payable By The Service Recipient Even If Already Collected And Paid By Service Provider?

The basic principle governing indirect taxes is that the incidence of tax is borne by consumer and not by the person supplying such goods or services. The tax so charged and collected from such consumer is required to be deposited to the Government by the person supplying such goods or services, who is also required to comply with statutory provisions of the respective indirect tax statute. However, in certain cases, the liability to pay the tax is shifted from the supplier of the goods & services to the recipient (e.g. Goods Transport Agency). This is known as payment of tax under the reverse charge mechanism.

However, at times, in cases where tax is required to be paid under reverse charge by the recipient, the same is collected & deposited by the service provider. The service recipient in such cases usually reimburses the amount of tax charged by the service provider on its invoice, along with payment of the amount charged for such service. Further, such service recipient may have also availed input tax credit of the taxes so paid (wherever eligible). When such instances are discovered by the Department, whether during audits or otherwise, demand of tax payable under reverse charge is raised on the service recipients.

This issue has been subject to multiple litigation and recently, in case of Mahanadi Coalfields Limited v.s. Commissioner of CGST & CX, Rourkela Commissionerate Service Tax Appeal No.77172 of 2019, the Hon’ble CESTAT Kolkata has decided the issue in the favor of the service recipient.

In the facts of the above mentioned case, the Petitioner, being the recipient of service was required to deposit Service Tax under reverse charge on 75% of the taxable value of the Security Services received by it during FY 2012-13. However, the supplier of services charged service tax on the entire value of taxable services provided by it. The total amount of service tax charged by the service provider was reimbursed by the Petitioner and the same was also duty deposited with the Government. However, the Adjudicating Authority did not take into cognizance the challans submitted by the service provider evidencing payment of entire service tax amount and confirmed the demand of service tax payable under reverse charge on the Petitioner along with equivalent penalty and applicable interest. The demand was also upheld by the Ld. Commissioner (Appeals).

Before the Hon’ble CESTAT, the Petitioner argued that where the entire tax amount on the said transaction stood deposited in the Government Treasury, albeit by the Service Provider instead of the Service Recipient, no further demand could be raised.Reliance was placed upon the following decisions:

  • Navyug Alloys Pvt. Ltd. v. CCE, Vadodara-II, 2009 (13) STR 421
  • Mandev Tubes v. CCE, Vapi 2009 (16) STR 724 (Tri-Ahm)
  • Umasons Auto Compo (P.) Ltd. v. CCE, Aurangabad 2016 (46) STR 405 (Tri-Mum.)

The Hon’ble CESTAT noted that from the records, it was evident that the payment of tax by the Service Provider was duly supported by way of confirmation from CBIC website. Further, neither the tax calculation details nor the payment confirmation was disputed by either of the authorities below. The Hon’ble CESTAT held that there is no reason to confirm the demand when service tax stands already paid and there is no loss of revenue to the Exchequer and accordingly set aside the demand of service tax, interest & penalty.

K&K Comments:

The issue is no longer res integraand has been decided in favor of the assessee under the Service Tax regime.Similar view has also been taken by other benches of Hon’ble CESTAT in the following cases:

  • Sandvik Asia Pvt. Ltd. Vs. Commissioner of Central Tax, Pune MANU/CM/0134/2018
  • Kent Chemicals Private Ltd. Vs. Commissioner, CGST, Jaipur MANU/CE/0111/2019

Accordingly, it is clear that in cases where Service Tax is payable by the recipient under reverse charge, but has been collected and deposited to the Government by the service provider, the said tax cannot be recovered again from the service recipient.

For further discussion on the issue and its significance under the GST Law, feel free to reach out.

About the author: Anubhav Gupta, a Principal Associate- Taxation at Khurana & Khurana, Advocates and IP Attorneys.  In case of any queries please contact/write back to us at anubhav@khuranaandkhurana.com .

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