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19 May 2021

No Service tax on remuneration received by partner from partnership firm for services performed in terms of partnership deed

Recently in the case of Cadila Healthcare Limited vs CST & ST, Ahmedabad, wherein Cadila Healthcare Limited (hereinafter referred as applicant) is public limited company engaged in business of manufacturing of pharmaceutical products as well as providing various services, has formed a partnership firm 'Zydus Healthcare’ wherein appellant was a partner with 96% share and 2% each share of other two partners. In partnership agreement, an addendum was added and as per terms of addendum appellant agreed to provide certain services to partnership firm 'Zydus Healthcare’ related to promotion and marketing of firm's product and various related services.

Appellant towards said services received remuneration from ‘Zydus Healthcare' on which they paid service tax and also paid interest whenever there was a delay in paying service tax. Subsequently, when they realized on the basis of their consultant’s advice that services provided by a partner to a partnership firm does not fall under ambit of services as per Finance Act, 1994 and thus they filed for refund claims. The said refund claims were rejected by Assistant Commissioner of Service Tax. Thereafter, being aggrieved by the rejection of refund claim, the appellant filed appeals before the Commissioner (Appeals) which came to be rejected. Hence, appellant filed appeal in CESTAT-Ahmedabad.[2021]127 taxmann.com 112 (Ahmedabad-CESTAT)[27-04-2021]

Whereby reliance was placed on numerous judgments including the Hon‘ble Supreme Court judgment in the case of Dulichand Lakshminarayan vs Commr. Of Income Tax 1956 (29) ITR 53 wherein it was held that firm is not a person and definition in General Clauses Act of ‘person’ is inapplicable to Partnership Act.  Hon‘ble Supreme Court also held that as per general concept of partnership, a firm is not an entity or a ‘person‘ in law but merely an association of individuals who constitute the firm. With this law laid down by the Apex Court, it cannot be said that the appellant being the partner and M/s Zydus Healthcare being a partnership firm have relationship of service provider and service recipient

Further, partner ‘s capital can be in the form of cash/asset. It can also be in the form of contribution of skill and labour alone without contribution in cash. Therefore, remuneration received by a partner by employing his skill and labour as per partnership deed is also a profit. The profit in such circumstances can be a special share in the profit. In the present case, the appellant is a partner performing some duties for which he has an expertise, skill in the marketing and distribution of the goods manufactured by partnership firm M/s Zydus Healthcare. And as a remuneration, the appellant have been received the amount which is nothing else but a special share in the profit.

Therefore on the basis of above it was held that Remuneration received by appellant from its partnership firm towards certain activities performed in terms of partnership deed was nothing but profit in partnership sharing and same could not be treated as consideration towards provision of service under Finance Act, 1994.