2022 (2) TMI 1077 - HC - Service Tax

Demand of Interest on 50% of the service tax, which was not paid - Applicability of reverse charge mechanism - Works Contract Service - appellant raised invoices for 100%, however, remitted tax only for 50% - period December 2013 to 05.07.2014 - HELD THAT - In the present case, as admitted by both the parties, the reverse charge mechanism is not applicable to the appellant company. The reverse charge mechanism is applicable only to the individuals, Hindu Undivided Family, etc., where, the Department would normally adjust the amount paid by the service Recipient and re-credit the same to the service provider's account. Though it is strongly contended that the 50% amount paid by the service recipient cannot be re-credited to the appellant, the fact remains that the Department has re-credited the said amount from the service recipient's account to the appellant's account with effect from 28.02.2014. Thus, when the service provider (appellant) has paid entire 50% of the amount towards service tax and the service Recipient also paid the balance 50% of the service tax in time directly to the Service Tax Department on the assumption that the reverse charge mechanism is applicable, and when the Department also re-credited the said 50% of the service tax from the service recipient's account to the service provider's (appellant's account) with effect from 28.02.2014, instead of giving effect to the same from the date, on which, original payment was made by the service recipient, it is not open to the Department to turn down and say that reverse charge mechanism is not applicable, thus, the appellant is liable to pay interest on the belated payment. The procedure adopted by the service recipient cannot be found fault with as long as there is no specific bar under the Act to make tax remittance directly to the account of the service provider. Further, service recipient admitted that, they misunderstood that reverse charge mechanism is applicable to the appellant's Company and this mistake happened only in the first transaction and subsequently, 100% of the service tax has been collected by the service provider from the service recipient and remitted the same to the Department without any default/delay - the contention of the respondent- Department that 100% service tax has to be collected from the service recipient by the service provider and the same has to be remitted to the Department does not hold water. Appeal allowed.

Summary

Issues:
1. Applicability of reverse charge mechanism in service tax payment.

Analysis:
The case involved a Writ Appeal against an order dismissing a Writ Petition seeking to quash an order related to service tax payment. The appellant contended that they paid 50% of service tax in time for a Works Contract Service, with the service Recipient paying the balance directly to the Service Tax Department under the reverse charge mechanism. The Department re-credited the amount to the appellant's account later, leading to a dispute over interest payment from the due date to a specified period.

The appellant argued that there was no financial loss to the Government as the entire service tax was paid on time, and the Department's claim for interest was unwarranted. On the other hand, the respondents asserted that the appellant was liable for 100% of the service tax amount, emphasizing that discrepancies in tax remittance under the reverse charge mechanism could result in interest charges.

The Settlement Commission and the Writ Court upheld the order directing the appellant to pay interest for 50% of the service tax amount for a specific period. The central issue revolved around the applicability of the reverse charge mechanism. Both parties agreed that the mechanism did not apply to the appellant, yet the Department re-credited the tax amount from the service Recipient to the appellant's account.

The Court held that the Department's actions in re-crediting the tax amount to the appellant's account indicated acceptance of the reverse charge mechanism, despite contentions otherwise. It was noted that the service recipient's direct payment to the Department and subsequent re-crediting to the appellant's account did not warrant interest payment by the appellant. The Court emphasized that the ultimate collection of service tax from the recipient by the provider was essential, and the recipient's initial misunderstanding did not invalidate the tax payment process.

In conclusion, the Court found no merit in the Department's arguments and set aside the orders of the Settlement Commission and the Single Judge. The Writ Appeal was allowed, with no costs awarded, bringing closure to the legal proceedings.