PRE-CONDITION ASKING SERVICE PROVIDER TO PAY SERVICE TAX FIRST AND CLAIM LATER IS NOT JUSTIFIED

[Mr. M. GOVINDARAJAN]

Sec. 68 of the Finance Act is the principal section which fixes responsibility to pay service tax.  But in the cases and circumstances mentioned in Rule 2(1) (d) service receiver or the specified persons are liable to pay service tax.  The service tax is not payable on the billed amount.   It is the received amount liable to be credited in the Central Government Account.  The service beneficiary is the person to pay the service tax.   The receiver of the service can claim CENVAT credit against the service tax or central excise duty payable by him to the credit of Central Government.

The person who collects the service tax is liable to pay the service tax to the credit of the Central Government in the prescribed manner and within the time as provided in the Act as well as under rules made there under.  The issue raised in this article is whether the service receiver can insist the service provider to pay the service tax to the Department first and claim the service tax from him in the later period.   For this purpose we may refer the case law 'Introspective Detective Private Limited V. BSNL' - 2010 -TMI - 76373 - ALLHABAD HIGH COURT

In this case the petitioner is a registered agency under Section 69 of the Finance Act, 1994 with the office of Superintendent of Central Excise, Urban - II, Gorakhpur.  The agency is already registered with the office of District Labor Officer, Gorakhpur.   The petitioner claims that it is a registered firm with the Registrar of Society Registration (Chit & Fund Office), Gorakhpur since 1990.

The petitioner entered into an agreement with BSNL on 12.08.1998 for providing security guards initially for the period from16.08.1998 to 12.08.1999 which was further extended upto 30.06.2000.  The petitioner raised bills claiming service tax to BSNL which paid the bills excluding service tax directing the petitioner to pay the service tax first and claim the same from BSNL later. 

The petitioner was served with noticed issued by Assistant Commissioner, Central Excise and Service Tax Board, Gorakhpur to appear in person if so desired and pay the service tax for the period of April 1999 to June 2000 amounting to Rs.93,510/- as service tax.   The petitioners asked BSNL authorities to pay the said amount to them so that the Service tax as demanded by the Central Excise Department may be deposited.   However the BSNL authorities asked the petitioner to deposit the amount and then the said amount shall be released to the petitioner.

The petitioner, being aggrieved by the said action of BSNL authorities, filed the present writ petition seeking a direction to the BSNL authorities to pay entire service tax along with 18% interest and penalty to the petitioners, which is payable to the Central Excise Division, Gorakhpur as demanded by Central Excise Department through show cause notice.  BSNL in its counter affidavit has not denied its liability to pay the service tax.   On the other hand, they have expressed their willingness to pay service tax.  It is further contended that they are liable to pay service tax and are always ready to pay it but it could not be paid directly to the petitioner due to reasons stated in the affidavit.  The actions of the petitioner are totally illegal and arbitrary.

The High Court heard both sides.  BSNL is not disputing that the petitioner is liable to pay service tax.   However BSNL is insisting that first service tax should be deposited by the petitioner with the Central Excise Department and only thereafter the amount of service tax will be paid by BSNL to the petitioner, who is providing security service to the BSNL.  The Court observed that this kind of a precondition does not appear to be justified. 

The High Court directed BSNL to make payment of service tax at the prescribed rate to the petitioner without insisting upon the condition that the petitioner must first deposit the same with the Central Excise Department so that the petitioner may deposit the same with the Excise Department.  The Court also directed to pay interest for the late payment at the rate of 18%.   The petitioner was directed to deposit the service tax amount with the Central Excise Department.   The Court waived the penalty on the petitioner since the petitioner was prevented by sufficient cause in not depositing the service tax in time.