Service tax liability and assessment

Service provider failed to take service tax registration under bona-fide belief that he was not liable for it and raised bill to service recipient. However, the service recipient charged service tax to his service recipient for the same service and same amount without adding any profit margin. e.g. A charged Rs.100/- to B without service tax for xyz service. In turn B charged Rs.100/- + service tax to C. B collected the service tax and paid to government with/without claiming cenvat. My query is, under such circumstances can service tax department recover service tax from A? WHAT REMEDY IS AVAILABLE TO 'A' UNDER THE CIRCUMSTANCES IN SERVICE TAX ASSESSMENT? Because there is neither extra service provided by B nor any revenue loss to the government in this case.

Thanks in advance

Hi Mohan,

This is a classic situation involving service tax liability of a service provider who did not register, and a recipient who paid service tax downstream.

Here’s a detailed take on the issue:

1. Can the Service Tax Department recover service tax from 'A'?

Yes, A (the original service provider) is liable to pay service tax because:
- The liability to pay service tax is on the service provider under the law.
- Even if A was under a bona fide belief of not being liable, lack of registration does not absolve liability.
- The department can initiate recovery proceedings for unpaid service tax, interest, and penalties.
The fact that B collected and paid service tax to the government does not absolve A's liability.
Service tax law follows the principle of “pay first, recover later”.

2. Is there any revenue loss to the government?

From the government’s perspective, there is no revenue loss because B has discharged the service tax.
However, from a legal standpoint, A still remains liable to pay service tax as the original service provider.

3. What remedy is available to 'A' under service tax law?

Recovery from B: A can seek refund or recovery from B (the recipient who paid service tax) under “input service distributor” or reimbursement claims if there was a clear contract about service tax reimbursement.
Adjustment in Cenvat Credit: If B has claimed Cenvat credit for the tax paid, A may be able to coordinate with B for the tax to be reimbursed or adjusted.
Voluntary Registration and Payment: A should register voluntarily and pay service tax with applicable interest and minimize penalties by cooperating during assessment.
Penalties Relief: Since the failure to register was bona fide, A may apply for waiver or reduction of penaltiesduring the assessment or show cause notice proceedings.
Legal Recourse: In case of dispute, A can contest penalty or interest on grounds of bona fide belief, but service tax principal liability usually stands.

4. Summary of key points

Aspect	Explanation
Liability	On service provider (A), regardless of registration status.
Payment by recipient (B)	Does not absolve A’s liability but ensures no revenue loss.
Remedies for A	Recover from B, voluntary payment with reduced penalty, legal challenge for penalty waiver.
Registration failure	Must regularize by registering ASAP and paying dues.

If A has invoices and agreements clarifying that tax was not included and reimbursement was not agreed, then A’s position is weaker. But if tax was reimbursable, A can claim recovery from B.

Bottom line: A should register and voluntarily pay service tax with interest to minimize risk and negotiate recovery from B.