SERVICE PROVIDER AND SERVICE RECEIVER - THE TWO ARMS OF SERVICE TAX.

[Dr. Sanjiv Agarwal]

According to section 66, the charge of service tax is based on taxable event. The taxable event is the rendering of one of the taxable services as provided in sub-section 105 of section 65. The liability to tax arises only when a taxable service is provided or agreed to be provided by one person to other person. However, the collection of tax takes place when the consideration is actually received by the service provider. It no payment is received, there is no liability to pay service tax. Thus, in case of bad debts, service provider will not be liable to pay service tax to the Central Government.

Section 66A levies service tax on taxable services provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and received by a person who has his place of business, fixed establishment, permanent address or usual place of residence, in India such service shall, for the purposes of this section, be a taxable service.

In All India Tax Payer's Welfare Association v.Union of India [2006) TMI 612 (Madras High Court)] and Thermal Contractors Association v. Director, Rajya Vidyut Utpadan Nigam Ltd. [(2006) 7 STJ 108 (2006) 3 STT 329 (Allahabad High Court)], two high courts interpreted the provisions related to collection of tax. Madras High Court held that the service provider has to collect service tax from user of services and it cannot be said that provider of service shall pay service tax from his income without collecting service tax from user of service (telephone services). Section 12A of Central Excise Act which applies to service tax, provide that the provider of service is an assessee under section 65 of the Finance Act and he has to collect service tax from the users of service as contemplated under sections 12A and 12B of the Central Excise Act. In this context, it is necessary to refer that section 12A of the Central Excise Act ton templates that notwithstanding anything contained in this Act or any other law for the time being in force, every person who is liable to pay duty of excise on any goods shall, at the time of clearance of the goods, prominently indicate in all the documents relating to assessment, sales invoice, and other like documents, the amount of such duty which will form part of the price of which such goods are to be sold. Section 12B of the Central Excise Act contemplates that every person who has paid the duty of excise on any goods under this Act shall, unless the contrary is proved by him, be deemed to have passed on the full incidence of such duty to the buyer of such goods. Thus, the provider of service only to collect service tax from the users of service as contemplated under sections 12A and 12B of Central Excise Act, 1944. Thus, collection of service tax by telephone service provider from its telephone subscribers was held to be unsustainable, i.e., it can not be challenged on the ground that only a person rendering taxable service, and not the service receiver, has to pay service tax.

In the Thermal Contractor's case, Allahabad High Court where service providers were being paid for services rendered by members of petitioner association under a contract, held that even though under the service tax scheme, payer of service tax is entitled to realize service tax from its customers. It would depend upon the contracts entered into between the two parties as to who would pay the service tax. It also held that it was always open to service provider to charge or not to charge amount of service tax from its customers and to pay it from its own pocket. The court observed that in absence of any contract been filed with petition, the question could not be adjudicated. It may be noted that Supreme Court held in Tamil Nadu Kalyana Mandapam Association case 2005 -TMI - 135 - SUPREME COURT OF INDIA that the service tax is an indirect tax and is to be paid on all the services notified by the Union Government for the purpose of service tax.

Thus, the aforesaid judgments of High Court clearly bring in the following inferences -

(a) Levy of service tax is an indirect tax.

(b) In normal cases [not section 68(2) cases] service provider has to collect service tax from service receiver.

(c) It is open to service provider to collect service tax or not.

(d) Liability to pay service tax vests with provider of service.

Service Provider

Service tax is levied on taxable services only and not on the service provider. The service provider is only an instrument to deposit the service tax to the credit of Central Government who has been made as a person liable. As per Section 68, every person providing taxable services to any person or persons notified under sub-section (2) shall pay service tax. The terms 'service provider' has not been defined.

Various definitions suggest that service provider is bound to have different meanings for different taxable services. The definitions use the words like any person, any commercial concern, any agency, any establishment etc. as is illustrated in some of the services mentioned below-

•  Any person — air travel agent, architect, CA, CS, mandap keeper,
C & F agent, courier, broker, tour operator, cargo, cable operator etc.

•  Any commercial concern — advertising, aircraft operator, business auxiliary services, manpower recruitment, drycleaner, convention etc.

•  Any agency — broadcasting, commissioning & installation, manpower recruitment etc.

•  Any establishment — beauty parlour, coaching centre

•  Others — banking company, port, AAI, financial institution, body corporate etc.

•  New services — the term used is 'any person' in all services.

Now, all service provided in taxable services are defined to be any person.

   In Magus Construction  Pvt Ltd. v Union of India (2008) TMI 4479 (Gauhati High Court), court ruled that service tax is levied on taxable service only and not on service provider. He (service provider) is only a means for depositing service tax to the credit of the Central Government. Services provider provider service to the service receiver.

Service Receiver

Service receiver is a person who receives or avail the service provided by the service provider. Service receiver has also not been defined and for service receiver, various terms have been used such as — any person, policy holder, subscriber, customer, client, exhibitor, franchisee, shipping line etc. However, Finance Act, 2008 has substituted 'any person' in all the taxable services in place of client or customer as service tax is levied on services and status of service recipient should not determine the tax treatment.

Service tax is payable only when a taxable service is rendered or provided to the service receiver. While generally, in case of sale, receiver is the buyer or customer, in case of a service, service receiver is the client. There should exist a relationship of service provider and service receiver between the two parties to a service. Services are rendered to the client who can be called a policy holder (as defined in Insurance laws) or a subscriber (as defined in Telegraph Laws) or shipping line or franchisee or a customer or just a client, as the case may be. Oxford English Dictionary defines client to mean a person or organisation using the services of a lawyer or other professional person or company. Clients collectively are clientele.

Black Law Dictionary defines client to mean an individual corporation, trust or estate that employs a professional to advice or assist it professionals line of work.

In Magus Construction  Pvt Ltd. v Union of India (2008) TMI 4479 (Gauhati High Court), court  held that although the term 'service receiver' has not been defined in the Finance Act 1994, the ' service receiver' is a person who receiver or avails the services provided by a 'service provider'

A service provider can not be a client to himself. There must exist a commercial relationship between the two i.e., service provider must charge to the client and client should pay for the services received. Client is an external person who avails the services of another person for an agreed consideration. As per amendment made by Finance Act, 2008, in definitions, whenever 'customer' was appearing, has been replaced by the words 'any person'.

Discussions to this article

[VISHWANATH S MALGHAN]

The company has paid wage revision arrears to contract casulas after 16.11.2005 the day the service tax rule com into existance.The excise authorities are claiming service tax on the arreas paid to contract casuals work rendered prior to 16.11.2005. Is the service executed prior to 16.11.2005 and the payment made subsequently attract service tax. malghan