Service Tax over Inter Company Invoice

This query is : Resolved

Kailash Joshi (Querist)
Follow

19 February 2010 Facts

1. Party Involved: Client in India, ABC Canada, ABC India (Subsidiary of ABC Canada)

2. Contract: ABC receives the contract from Client in India. Afterwards, it fully transfers the same to its Subsidiary ABC India.

3. Transaction: ABC Canada raised the invoice to Client in India and other side ABC India rasied the invoice to ABC Canada.

4. Service Tax: ABC Canada need to pay the Service Tax on receipts basis whereas ABC India will pay the same at the time of Invocing to ABC Cananda as it is Inter Company transaction for them.

5. Problem : If Client in India deduct 50% money of Invoice then ABC Canada will pay ST accordingly and return only the 50% of amount to ABC India as the same it receive from client.

6. Query: As now ABC India only Received 50% amount so now what we do with service tax have already paid by 50% more over such invoice? Is there any relief or refund .. regarding this, please help…..

Madhukar N Hiregange

Madhukar N Hiregange (Expert)
Follow

19 February 2010 Under reverse charge the person in India is to pay. Therefore the client has to pay the ST if liable. What is the service provided and is it liable under sec66A is the question.

As far as associates enterprsioes are concerned the date of making entry/ provision is the date relevant for payment of ST.

Kailash Joshi

Kailash Joshi (Querist)
Follow

22 February 2010 If ABC India has already paid the 100% service tax at the time of Invoice then what is the relief to ABC India if they receive only 50% from ABC Canada as per above query?

ABC Canada has the PE in India.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

24 July 2025 This is a classic issue involving **service tax on inter-company transactions**, especially when payments are partial and involve cross-border dealings.

Here’s a detailed explanation and approach based on your facts:

---

### Facts Recap:

* ABC Canada (parent) contracts with Indian Client.
* ABC Canada subcontracts fully to ABC India (subsidiary).
* ABC Canada invoices Indian Client (including service tax on receipt basis).
* ABC India invoices ABC Canada (service tax on invoice basis).
* Indian Client deducts 50% payment to ABC Canada.
* ABC Canada pays ST on full invoice amount but only receives 50% payment.
* ABC India only receives 50% payment but has paid ST on 100% invoiced value.
* ABC Canada has a Permanent Establishment (PE) in India.

---

### Key Issues:

1. **Who pays service tax under reverse charge?**
Under the Reverse Charge Mechanism (RCM) on services received from outside India, the **person in India (ABC India or Indian Client)** is liable to pay service tax.

2. **Payment of service tax by ABC India on full invoice but receipt only 50% payment**
This creates a **mismatch** between service tax paid and actual receipt.

3. **Is refund or adjustment allowed if only partial payment received?**

---

### Explanation and Guidance:

#### 1. **Service Tax Liability & Reverse Charge**

* If the service is **imported service** under section 66A, the recipient in India pays service tax under reverse charge.
* If ABC India receives invoice from ABC Canada for services and pays ST, this is on **invoice basis** (not receipt basis).
* ABC Canada (non-resident) is not liable to pay service tax in India; recipient ABC India is liable.

#### 2. **Impact of Partial Payment**

* Service tax liability arises on **value of taxable service provided**, irrespective of payment receipt.
* So even if ABC India receives only 50%, service tax is payable on 100% invoiced amount.

#### 3. **Relief for Non-Receipt of Full Payment**

* Unfortunately, **service tax law does not allow refund or adjustment on account of non-payment or partial payment** from the other party.
* The liability arises on the taxable service value and invoice raised, not on cash flow.
* This is consistent with tax laws: service tax is on the **service value**, not on realized amounts.

#### 4. **Accounting and Risk Management**

* ABC India should maintain provision for **bad debts** or **adjustment for non-payment** separately in their accounts.
* For service tax, no adjustment or refund will be allowed purely due to non-receipt of payment.

#### 5. **If ABC Canada Has PE in India**

* ABC Canada having PE means the transaction between ABC Canada and ABC India may have tax implications locally, but service tax is primarily on the recipient in India.
* ABC India pays ST under RCM on imported service received from ABC Canada.

---

### Summary:

| Point | Position |
| ------------------------------------------------------- | ------------------------------------------------------- |
| Who pays service tax? | ABC India (recipient in India under RCM) |
| Is ST payable on full invoice value or received amount? | Full invoice value (100%) irrespective of receipt |
| Is refund or relief available if partial payment? | No refund or adjustment allowed for partial/non-payment |
| Accounting treatment for non-payment? | Recognize bad debt or provision separately |

---

### Suggested Actions:

* ABC India must pay service tax on full invoice amount irrespective of receipt.
* ABC India may take write-off/bad debt provision for non-recovered 50% in accounts.
* No service tax refund claim will succeed solely on partial payment basis.
* Ensure documentation and contracts clearly specify payment terms and tax liabilities.
* ABC India should consult tax advisor for potential credit or adjustments under other tax laws (Income Tax, GST if applicable now).

---

If you want, I can help draft a detailed note or letter on this for your management or tax authorities. Would that be helpful?

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