No demand of Taxes under Reverse Charge if Tax Already Discharged by Service Provider under forward charge

The CESTAT Hyderabad has ruled that a demand for tax under the Reverse Charge Mechanism (RCM) cannot be made if the service provider has already paid the entire service tax liability. This prevents double taxation on the same transaction. However, the benefit is contingent on the assessee conclusively proving that the service provider indeed paid the full tax.

The CESTAT, Hyderabad in the case of M/s Arunachala Logistics (P) Ltd. v. Commissioner of Central Tax, Hyderabad [Service Tax Appeal No. 30548 of 2018, Final Order No. A/30129/2026, order dated February 27, 2026] held that where the entire service tax liability has already been discharged by the service provider, any further demand on the service recipient under the Reverse Charge Mechanism (RCM) would amount to double taxation; however, such benefit is subject to the assessee conclusively proving that the tax has indeed been paid by the service provider.

Facts:

M/s Arunachala Logistics (P) Ltd. (‘the Petitioner’) is engaged in providing ‘Clearing and Forwarding Agent Services’ and ‘Goods Transport Agency (GTA) Services’.

The Commissioner of Central Tax, Hyderabad (‘the Respondent’) issued demand alleging that the Petitioner failed to discharge service tax liability under Reverse Charge Mechanism (RCM) on security services received from non-body corporate service providers.

The Petitioner contended that service providers had already paid 100% of the service tax on the entire consideration, and the tax component was reimbursed by the Petitioner. Therefore, there was no loss of revenue and no requirement to pay tax again under RCM.

The Respondent contended that statutory liability under Section 68(2) read with Notification No. 30/2012-ST dated June 20, 2012 mandates payment of 75% tax by the service recipient under RCM, and the Petitioner cannot avoid liability merely on the ground that the service provider paid tax. It was further contended that evidence did not establish that 100% tax had been paid by the service providers.

Aggrieved by confirmation of demand and partial relief in penalty by the Commissioner (Appeals), the Petitioner approached the Tribunal by way of appeal challenging the demand under the Finance Act, 1994.

Issue:

Whether service tax liability under Reverse Charge Mechanism can be demanded from the service recipient when the service provider has allegedly already discharged the entire service tax liability on the same transaction?

Held:

The CESTAT, Hyderabad in Service Tax Appeal No. 30548 of 2018, Final Order No. A/30129/2026 held as under:

• Observed that, there is no need to confirm the demand again when service tax stands already paid and that there is no loss of revenue to the exchequer.
• Noted that, demand of service tax from the recipient, where tax has already been paid by the service provider, would amount to double taxation on the same amount which itself is erroneous.
• Observed that, even though the statute prescribes proportionate liability (25% by provider and 75% by recipient), if the service provider has discharged the entire liability, any further demand would lead to double taxation on the same set of services.
• Noted that, such payment by the service provider can be treated as payment on behalf of the service recipient.
• However observed that, the Petitioner failed to conclusively prove that 100% service tax was paid by the service provider or reimbursed by the Petitioner.
• Held that, if evidence establishes that entire service tax has been discharged by the service provider, demand against the recipient would not sustain; otherwise, the demand would survive along with interest.
• Directed that, the matter is remanded to the Original Authority to verify whether service tax was fully paid by the service provider and decide the demand accordingly.

Our Comments:

The Tribunal relied on Mahanandi Coalfields Ltd. v. Commissioner of CGST& CX, Rourkela Commissionerate [2020 (99) TMI 477 – CESTAT Kolkata] , wherein it was held that once service tax has already been paid, no demand can be confirmed again, as there is no revenue loss. The reasoning aligns with the principle against double taxation and recognizes substantive compliance over procedural liability allocation.

Further reliance was placed on Utility Labour Suppliers v. Commissioner of CE, Ahmedabad-II [2024 (11) TMI 1227 – CESTAT Ahmedabad] , which held that recovery of tax from the recipient when tax is already discharged by another party amounts to double taxation and is unsustainable. The Tribunal also referred to Navayug Alloys Pvt. Ltd. v. CCE, Vadodara-II [2009 (13) STR 421 (Tri)] , holding that even if tax was liable to be paid under RCM but already paid by the service provider, it was not upon to the Department to confirm the same against the appellant.

Relevant Provisions:

Section 68 of the Finance Act, 1994

“68. Payment of service tax.-

(1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed.

(2) Notwithstanding anything contained in sub-section (1), in respect of such taxable services as may be notified]  by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

OFFICIAL JUDGMENT COPY HAS BEEN ATTACHED