2014 (11) TMI 207 - AT - Service Tax

Waiver of pre deposit - taxability of activities in the nature of services provided by partners to the partnership firm Whether allowing trademarks of overseas partner to be used by partnership firm in India is taxable under the category of intellectual property service Whether activity of Indian partners allowing their land, building and other properties to be used by the firm is taxable under category of business support service Held that - When the firm is not a legal person and is not a distinct entity and is not distinct and independent from partners, it is difficult to accept the view upheld by the learned Commissioner that there is a service receiver-provider relationship between the two partners and the firm. When the firm is not at all a person and is not distinct from the partners, this observation is difficult to sustain. Naturally the entire amount of gross profit received cannot be attributed to licence even if it is assumed that it is so. Further the submission made by the learned counsel that somehow many of the licences for which licensing agreement provided for usage by HDC were actually developed by the firm itself and according to the appellants, the registration had to be done in the name of one of the partners, because the partnership firm has no legal personality. At the same time to enable the firm to use the name and since the products were manufactured in the name of the firm, a licence agreement would be required. In our opinion, even if it is assumed that a firm is a distinct entity, the nature of transactions between the two partners and the firm would be one of joint-venture or a profit sharing operation and it is difficult to sustain the stand that there is a service receiver and provider relationship. Stay granted.

Summary

Issues:
1. Whether the use of trademarks by a partnership firm constitutes a taxable service under 'intellectual property rights service' category.
2. Whether the contribution of capital, land, and buildings by partners in a partnership firm is liable for service tax under 'business support service' and 'intellectual property rights service' categories.
3. Validity of the demand for service tax, interest, and penalties imposed on the partnership firm.

Analysis:

Issue 1:
The case involved a partnership firm engaged in the research, development, and manufacture of ayurvedic medicines, cosmetics, and toiletries. The firm faced a demand for service tax under the 'intellectual property rights service' category for using trademarks registered in the name of one of the partners, an overseas company. The Revenue contended that allowing the use of trademarks constituted a taxable service. However, the appellants argued that a partnership is not a legal entity separate from its partners, citing the Partnership Act, 1932. They emphasized that partners are not considered separate entities from the firm, and the liability of partners is unlimited. The Tribunal noted that a partnership firm is not a legal person like a company, and the relationship between partners and the firm is more of a joint-venture or profit-sharing operation, rather than a service provider-receiver relationship.

Issue 2:
Another aspect of the case involved the contribution of capital, land, and buildings by partners, with the Revenue contending that such contributions were liable for service tax under the 'business support service' and 'intellectual property rights service' categories. The appellants argued that the partners' contributions were part of a joint-venture arrangement and did not constitute taxable services. They highlighted that the partners' contributions were towards the firm's capital and not in exchange for specific services. The Tribunal found merit in the appellants' arguments, emphasizing the lack of a clear service provider-receiver relationship between the partners and the firm, especially considering that a partnership firm is not a distinct legal entity.

Issue 3:
The Tribunal reviewed the partnership deed and found that all partners had agreed to the terms and conditions, contradicting the Revenue's claim that the partners were not actually partners of the firm. The Tribunal also addressed the issue of the partnership deed's registration, noting that while registration is not compulsory, the consequences of non-registration should be considered. Ultimately, the Tribunal found that the appellants had presented a strong prima facie case against the demand for service tax and penalties, leading to the waiver of predeposit and a stay against recovery of dues.

In conclusion, the Tribunal's detailed analysis highlighted the unique nature of partnerships and the lack of a clear service provider-receiver relationship in the context of the case, ultimately favoring the appellants in their challenge against the demand for service tax and penalties.