TMI Blog2022 (5) TMI 800X X X X Extracts X X X X X X X X Extracts X X X X ..... rtnership firm when a partner discharges his duties as a partner pursuant to deed of partnership. Hence no service tax is payable on the activities performed by the respondent in the capacity of partner to the firm - Section-65(105)(zzb) applies to service provided to a client by a person in relation to business auxiliary service. Hence, two distinct persons are required to attract this levy. Partner s capital to a firm 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 sweat equity . The substantial questions of law are answered in favour of the respondents and against the revenue - appeal dismissed - decided against Revenue. - R/TAX APPEAL NO. 102 of 2022 With CIVIL APPLICATION (FOR STAY) NO. 1 of 2022 In R/TAX APPEAL NO. 102 of 2022 With R/TAX APPEAL NO. 103 of 2022 With CIVIL APPLICATION (FOR STAY) NO. 1 of 2022 In R/TAX APPEAL NO. 103 of 2022 - - - Dated:- 30-3-2022 - HONOURABLE MR. JUSTICE J.B. PARDIWALA AND HONOURABLE MS. JUSTICE NISHA M. THAKORE R/TAX APPEAL NO. 102 of 2022 With CIVIL APPLICATION (FOR STAY) NO. 1 of 2022 In R/TAX APPEAL NO. 102 of 2022 With R/TAX APPEAL NO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Tribunal was correct and justified in holding that M/s. Cadila Healthcare Ltd. being a partner and M/s. Zydus Healthcare being a partnership firm cannot be considered as service provider and service recipient with regard to providing taxable service and receipt of remuneration thereof and whether Hon ble CESTAT is right in holding partner and partnership firm cannot be distinguishable as distinct legal entity other than their relationship of partner partnership firm in terms of providing taxable service and receipt of remuneration thereof? [C] Whether in the facts and circumstances of the case and law, the Hon ble Tribunal was correct and justified in holding that M/s. Cadila Healthcare Ltd. being a public limited company is not liable for payment of Service Tax on receipt of remuneration towards services provided to its partnership firm M/ s. Zydus Healthcare? [D] Whether in the facts and circumstances of the case and law, the Hon ble Tribunal was correct and justified in holding that the services provided by a partner to its partnership firm do not fall under the ambit of services as per Finance Act, 1994 and that the remuneration received from the partnershi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and appointing Stockiest for Distribution of the Firm's products; F. Guiding and helping in Procurement of inputs such as raw materials, packing materials, consumables, plant and machinery, equipments for the Firm; G. Providing legal, technical and managerial assistance for the smooth and efficient conduct of the business of the Firm. 6.6 Thus, the Respondent, in its capacity as a partner of the firm was to carry out certain activities such as distribution of goods manufactured by the partnership firm, marketing of the goods manufactured by the partnership firm, functioning as a consignment and sales agent of the partnership firm etc. 6.7 The case put up is that the Respondent undertook these activities in its capacity as a partner of the firm in accordance with the deed of partnership. These activities were not undertaken pursuant to a separate contract between the Respondent and the partnership firm for the purpose of providing any service. Factual Background: 6.8 During the period between 01.10.2010 and 31.12.2010 the Respondent received remuneration of Rs.38,50,00,000/-from the partnership firm as the partner's remuneration for performing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be said that both are one and the same and therefore, one of the Partners can provide services to the Partnership Firm wherein, he, himself is one of the Partners. 8. So far as the definition of the term Person is concerned, as considered by the Tribunal prior to 2012 when the definition of Person was not included in the service tax regime, the tribunal had taken note of the definition of Person even under the General Clauses Act, which specifically provides that a Person shall include any company or association or body of individuals whether incorporated or not. The CESTATE itself has recorded that the Partnership Firm is an association of individuals and a Firm name is only collective of those individuals, who consitute the Firm. Therefore, in the present case, one person is the Partner, who is the supplier of service and the recipient of service is the Partnership Firm. 9. Mr. Lodha submitted that the remuneration received by the Partner in lieu of the services rendered to the Partnership Firm is recorded as partners remuneration from the Partnership Firm in the account of the Partner and not as a share of profit received from the Partnership Firm. Even in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at a firm is not a person in law, but is merely an association of individuals, who constitute the firm. In such circumstances, the respondent firm cannot be considered as a person distinct from the respondent partner. In other words, according to the learned senior counsel, there cannot be a service provider/service recipient relation between the partner and a partnership firm, more particularly, when the person is discharging his duties as a partner pursuant to the deed of partnership. The argument of the learned senior counsel is that no service tax is payable on the activities performed by the respondent in its capacity as a partner of the firm. In such circumstances referred to above, the learned senior counsel prays that there being no merit in the appeals, those be dismissed. ANALYSIS :- 12. For the period prior to 01.07.2012, there is no definition of a person in the Finance Act, 1994. 12.1 The term person was defined for the first time with effect from 1.7.2012 vide Section 65B (37) of the Finance Act. The period of dispute in all these appeals is prior to 01.07.2012. 12.2 Prior to 01.07.2012, there was no definition of the term person in the Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that as per the general concept of partnership, established in English law as well as Indian law, a firm is not an entity or a person in law, but merely an association of individuals who constitute the firm. The Supreme court further held that the definition of person as occurring in Section 3(42) of the General Clauses Act, 1897 cannot be imported as it would be repugnant to the partnership law. 15.5 The relevant portion of the judgment is extracted below: As pointed out in Lindley on Partnership, 11th Edition at page 153, merchants and lawyers have different notions respecting the nature of a firm. Commercial men and accountants are apt to look upon a firm in the light in which lawyers look upon a corporation, i. e., as a body distinct from the members composing it. In other words merchants are used to regard a firm, for purposes of business, as having a separate and independent existence apart from its partners. In some systems of law this separate personality of a firm apart from its members has received full and formal recognition, as, for instance, in Scotland. That is, however, not the English common law conception of a firm. English lawyers do not recognize a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not a person was again reiterated in the Commissioner of Income Tax Vs R.M. Chidambaram Pillai 1977 (106) ITR 292 (SC). 16.1 The Supreme Court, once again analysed the legal status of a partnership firm and its partners. It was again reiterated by the Supreme court that a partnership firm has no legal existence separate from the partners, under the Partnership Act. 16.2 The relevant portion of judgment is reproduced below: First principles plus the bare text of the statute furnish the best guidelight to understanding the message and meaning of the provisions of law. Thereafter, the sophisticated exercises in precedents and booklore. Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes of personality. Partnership is a certain relation between persons, the product of agreement to share the profits of a business. Firm is a collective noun, a compendious expression to designate an entity, not a person. In income-tax law a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz., the emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not make a firm a corporate body. Moreover, we are not persuaded by that ruling of the Privy Council, particularly since a pronouncement of this court in Dulichand Laxminarayan v. Commissioner of Income-tax [1956] 29 ITR 535 , 540, 541; [1956] SCR 154 (SC) strikes a contrary note. We quote: In some systems of law this separate personality of a firm apart from its members has received full and formal recognition as, for instance, in Scotland. That is, however, not the English common law conception of a firm. English lawyers do not recognise a firm as an entity distinct from the members composing it. Our partnership law is based on English law and we have also adopted the notions of English lawyers as regards a partnership firm . 16.3 In view of the above, it can be said that a partnership firm is not a separate entity than its partners. 17. The revenue seeks to rely upon the decision of the Supreme Court in the case of State of Punjab vs. Jullunder Vegetables Syndicate reported in 1966 AIR 1295, but the same is distinguishable. In the said case the Sales Tax Act specifically defined a dealer to be a firm. The question was whether a partnership firm could be as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of tax, penalty or other sum payable by the firm. Even in the East Punjab General Sales Act, 1948 section 2(d) defining dealer considered a firm or Hindu undivided family engaged in the business of selling or supplying goods within the meaning of dealer , besides, any person . Obviously, therefore, where a firm could be a dealer under the Sales Tax law and was required to file returns, the liability of such separate assessable entity would stand on its own. There is no such provision under the Excise Act and the Rules treating a partnership firm as a separate assessable entity .. 15. An individual person has a legal personality and status recognized by virtue of natural persons rights and liabilities. A body of natural persons will retain their individual legal status and personality. They can collectively embark upon tasks they choose to undertake. By mere joining hands they do not bring about a different and distinct legal entity or legal personality. For their individual and collective actions they would themselves be liable jointly and severally in their partnership pursuits. When they constitute a partnership firm and adopt a firm name for their busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration or interest. A partner is bound to find the necessary finances for the partnership and hence any interest on capital supplied by the partner is not deductible. A partner's rendering services to the firm stands on the same footing as his providing capital; only instead of in money, in kind. Further, no remuneration is permissible to a partner for his rendering services to the firm, since the carrying on of the business of the partnership is a primary duty which all the partners, or some of the partners acting for all, are required to do by the law relating to partnership. The matter may be looked at another way too. In law, a partner cannot be employed by his firm, for a man cannot be his own employer. A contract can only be bilateral and the same person cannot be a party on both sides, particularly in a contract of personal employment. A supposition that a partner is employed by the firm would involve that the employee must be looked upon as occupying the position of one of his own employers, which is legally impossible. Consequently, when an arrangement is made by which a partner works and receives sums as wages for services rendered, the agreement should in truth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the contract between the two individuals. As is well known, the aim of business is earning of profit. When an individual contributes cash asset to become partner of a partnership firm in consideration of a share in the profits of the firm, such contribution helps and at any rate is calculated to help the achievement of the purpose of the firm namely to earn prof- it. The same purpose is, undoubtedly, achieved also when an individual in place of cash asset contributes his skill and labour in consideration of a share in the profits of the firm. Just like a cash asset, the mental and physical capacity generated by the skill and labour of an individual is possessed by or is a possession of such individual. Indeed, skill and labour are by themselves possessions. Any possession is one of the dictionary meanings of the word 'property'. In its wider connotation, therefore, the mental and physical capacity generated by skill and labour of an individual and indeed the skill and labour by themselves would be the property of the individual possessing them. They are certainly assets of that individual and there seems to be no reason why they cannot be contributed as a consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dras High Court in the case of Mathew Abraham v. Commissioner of Income-tax [1964] 51 ITR 467, 471 (Mad) was overruled by the Supreme court in this case by observing as follows: We regard this conclusion as unsound, the source of the error being a failure to appreciate that the salary of a partner is but an alias for the return, by way of profits, for the human capital- sweat, skill and toil are, in our socialist republic, productive investment-he has brought in for common benefit. The immediate reason for payment of salary was service contract but the causa causans is partnership. 23. The Punjab Haryana High Court in the case of Bhagwant Singh v Commissioner of Income Tax AIR 1959 P H 594 laid down the very same principles of law. 23.1 The issue that arose for consideration was the nature of salary drawn by the partner. It was held by the High Court that when a partnership agreement recites that one of the partners will receive a salary for the services rendered by him to the partnership business, the contract is regarded as a contract of partnership and is not designated as a contract of service. 23.2 The High Court observed that a partnership is an agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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