Service Tax on Related parties

This query is : Resolved

Vijayaganesh Sampathkumar (Querist)
Follow

04 April 2008 I have a query with regard to Union Budget 2008 changes.

The explanation to sec.67 has been amended to include the following:

(7b) "associated enterprise" has the meaning assigned to it in section 92A of the Incometax Act, 1961;

(c) "gross amount charged" includes payment by cheque, credit card, deduction from
account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.’

In view of the above change, let us consider a scenario. I am a service provider. I provide services to A (related party) and B (not a related party). I send an invoice for services rendered to both A and B. The invoice is for 100000 service rendered and service tax @ 12% which is 12000, for a total of 112000.

Now, should i pay the service tax on the transaction with A immediately, without waiting for A to pay me the amount?

In respect of B, i would be paying the amount of 12000 service tax, only after B pays me the amount of 112000.

Because of the budget changes, am i liable for service tax as soon as i treat A as my Debtor (being a related party)?

Can someone please clarify? That would greatly help.

Thanks in advance.

Best Regards / VIjay

S.Srinivasaraghavan

S.Srinivasaraghavan (Expert)
Follow

05 April 2008 1.In the case of A (related)yes.
2.In the case of B (unrelated)yes.

R.V.RAO

R.V.RAO (Expert)
Follow

05 April 2008 SERVICE TAX ACT DOES NOT PROVIDE ANY EXCEPTIONS TO RELATED OR UNRELATED PARTIES.
EVEN IF YOU ARE NOT A REGD. SERVICE PROVIDER, AND EVEN IF YOU COLLECT THE SERV. TAX NOW OR LATER OR EVEN IF YOU ARE UNABLE TO COLLECT THE SERV. TAX OR FAIL TO COLLECT FOR WHATEVER REASON , IF THE SEVICE IS A CHARGEABLE SERVICE AND TAXABLE,YOU MUST BILL THE SAME AND DEPOSIT BY DUE DATE.( AT PRESENT THERE ARE NEARLY 109 SERVICES TAXABLE).
THE AS RELATING TO INCOME TAX ACT DOES NOT APPLY TO SERV. TAX ACT.
R.V.RAO

Arbind Aggarwal

Arbind Aggarwal (Expert)
Follow

07 April 2008 What you have written is correct, but these changes will come into effect from the date of enactment of Finance Act which is enacted after The President Of India signes it.Generallythis happens somewhere in middle of May.

Vijayaganesh Sampathkumar

Vijayaganesh Sampathkumar (Querist)
Follow

08 April 2008 Dear Sirs,
Thanks for your response. I really appreciate it. However, i shall provide some more details about what is still bothering me..

1) My understanding is that Rule 6(1) of the service tax rules,1994 is the basis for paying service tax only upon receipt of payments.

2) The following is an explanation given at Taxmann website, quoting a departmental clarification letter and budget 2008 changes. Please note that this is only an extract, and the full details can be read at the following link:
QUOTE:
As an anti-avoidance measure, it is proposed to clarify that service
tax is leviable on taxable services provided by the person liable to
pay service tax even if the amount is not actually received, but the
amount is credited or debited in the books of account of the service
provider. In other words, service tax is required to be paid after
receipt of payment or crediting/debiting of the amount in the books
of accounts, whichever is earlier. However, this provision is restricted
to transaction between associated enterprises. This provision
shall also apply to service tax payable under reverse charge
method (Section 66A) as taxable services received from associated
enterprises. For this purpose section 67 and rule 6(1) are being
amended.
UNQUOTE
(Source - http://www.taxmann.net/Budget2008/GST4.pdf ) Please refer 3rd para under departmental clarification.

There is one amendment to Rule 6 in union budget 2008 (http://www.servicetax.gov.in/notifications/notfns-2k8/st04-2k8.pdf). This change is not for Associated enterprises transactions. However, i do not see any changes to rule 6 for associated enterprises..

Hence my doubt is.. Since the Rule 6(1) is not yet amended (for addressing the Associated Enterprises part..), would it not override the Sec.67 change and i need not pay Service Tax on transactions with Associated enterprises, unless i receive the money from them?

I might be missing the very obvious here. But please help me in understanding this correctly.

Thank you very much for your patience and valuable time.

Thanks / Vijay

Message likes : 1 times

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
Follow

24 July 2025 Great detailed query — let me clarify the interplay between Section 67 amendment and Rule 6(1) of Service Tax Rules regarding **service tax on related party (associated enterprise) transactions** post-2008 Budget changes.

---

### Background:

* **Section 67 Explanation** (amended in 2008) introduced that **"gross amount charged"** includes not only actual payment but also amounts credited or debited in books (e.g., accounting entries, credit notes, debit notes, suspense accounts) **for transactions with associated enterprises**.

* **Rule 6(1) of Service Tax Rules, 1994** originally allowed payment of service tax on **receipt basis** — i.e., service tax payable when the payment is actually received.

---

### Key Point of Confusion:

* The amendment to Section 67 says for associated enterprises, tax liability arises **as soon as amount is credited or debited in books**, regardless of actual receipt.

* Rule 6(1) still says tax payable on receipt basis, but the Budget 2008 notification did **not immediately amend Rule 6(1)** to explicitly address associated enterprise transactions.

---

### What does this mean practically?

* The **amended Section 67 overrules Rule 6(1) only in respect of associated enterprise transactions**.

* This is an **anti-avoidance provision** aimed at preventing delaying of service tax payment by simply deferring receipt of payment from related parties.

* So, **for associated enterprise transactions:**

* Service tax is payable on the earlier of:

* **Receipt of payment**, or
* **Crediting/debiting the amount in books of accounts** (e.g., invoicing, raising a debit/credit note, or accounting entry).

* For **unrelated parties:**

* Rule 6(1) continues to apply — i.e., service tax payable on receipt of payment.

---

### What about the fact that Rule 6(1) was not amended immediately?

* Although Rule 6(1) was not amended at the exact time, the **Section 67 Explanation amendment is a substantive law change and takes precedence**.

* The Department and courts interpret this as: **For associated enterprises, Section 67 amendment applies even before Rule 6 is amended.**

* Subsequently, Rule 6(1) was amended (later in 2008) to bring it in line with this change.

---

### Summary answer to your doubt:

| Scenario | When is service tax payable? |
| ---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| **Transaction with related party (associated enterprise)** | On earlier of payment receipt or credit/debit entry in books — so service tax is payable as soon as you treat the amount as receivable, even if no payment received yet. |
| **Transaction with unrelated party** | On receipt of payment (as per Rule 6(1)). |

---

### Additional references:

* Finance Act 2008 (Section 67 amendment).
* Service Tax Rules amendment notification (No. 04/2008-ST dated 19-06-2008).
* Departmental clarifications available on Taxmann and CBEC circulars (2008).
* Case discussions on anti-avoidance related to associated enterprises transactions.

---

### Practical recommendation:

* If you provide taxable services to associated enterprises, **pay service tax as soon as you raise invoice or account for receivable**, even if you have not received the payment.
* For unrelated parties, continue paying service tax on receipt basis.
* Maintain proper accounting and documentation to substantiate timing of credit/debit entries.

---

If you'd like, I can help draft a note or checklist for your accounting team on this treatment. Would you want that?

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now