Associated Enterprises

Transactions between associated enterprises
Service Tax is payable by a service provider (SP) only when he receives the money from client/service receiver (SR). However , with effect from 10th May, 2008 the
following change has been made in service tax law :
• If a service provider provides the service to its associated concern , then the service provider is liable to pay service tax when he receives the money or books the income whichever is earlier.
• For this purpose “associate concern” will have the same meaning as defined in Section 92A of the income-tax Act, 1961. To inflate profit , many companies would credit the income and debit the account of associated concern . This debit to associate concern will not be actually received for many years. There was no service tax liability as the money was not received.
Now the service provider has to pay service tax even if money is not received. In other words SP has to pay service tax on accrual basis in respect of transaction with associated concern, but service receiver can take the CENVAT of the same only when service receiver makes
the payment to the associated service provider. For example
• Associated SP debit account of SR for Rs. 100,000 towards taxable service provided on 31st May, 2008 and receives the money towards this entry on 31st March, 2010.
• SP is liable to pay service tax on 5th June, 2008 but the SR cannot take the credit of the same in May, 2008
• SR can take the credit of the same on or after 31st March, 2010.