Failure to collect and pay Service Tax

This query is : Resolved

K V Subba Rao (Querist)
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21 June 2008 (1) X Company provides taxable service to Y Company. In turn, Y Company provides taxable services to lakhs of its (Y)Customers.

(2) X Company did not collect and pay Service Tax (about Rs 4 lakhs pm)to the Department. Y Company was collecting Service Tax (about Rs 6 lakhs pm) from its (Y) Customers and paying over the same to the Department regularly

(3) X Company did not ask Y Company to pay Service Tax. So Y Company did not pay Service Tax to X Company and therefore did not claim credit for Input Tax

(3) Now the Department served a Notice to X Company to pay Service Tax WITH RETROSPECTIVE EFFECT.

(4) For future period, Y Company has no objection to pay Service Tax to X Company since Y Company can claim credit for Input Tax, that is, deduct the amount paid (Rs 4 lakhs pm) from amount collected (Rs 6 lakhs pm) and pay only net amount (Rs 2 lakhs pm).

(5) Now problem is about arrears for the old period.

(6)Both X Company and Y Company want to continue to cordial relations. Kindly advise to get over the problem

Shyam Lal Naik

Shyam Lal Naik (Expert)
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22 June 2008 X company can raise a supplimentary bill for service tax for the earlier period. There is no restriction on Y taking cenvat credit after making payment of the supplimentary bill.

K V Subba Rao

K V Subba Rao (Querist)
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22 June 2008 Thank you Mr Shyam for your prompt response. We shall follow your suggestion for future. The problem is about past arrears amounting to about a whopping sum of Rs 80 lacs. Since the Govt already received Svc Tax by way of remittance made by Y Company from time to time, can X Company request the Department to drop action. If you came across any case law on similar situation, we shall be thankful to you.

In similar situation for TDS under the Income Tax Act, recently the Supreme Court gave a ruling in favour of assessee. The Court permitted the IT Department to collect only Interest for the intervening period (from the time Deductor was due to pay TDS upto the time when Deductee paid Income Tax directly to the Dept.)

If we can trace any court ruling or departmental circular for Svc Tax, it would help us a lot; otherwise Y Company has to pay Rs 80 lacs at one time and claim Input tax credit over a very long period of over three years suffering liquidity and interest.

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