IGI Logo

In a big relief to individuals operating as partners in partnership firms, the Ahmedabad bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that any remuneration received by them, as per the obligation of the partnership deed, would be treated as share of profit and not as service under service tax law.

What this effectively means is that partners would not be liable to pay GST on the remuneration received by them from a partnership firm but would account for such payment as income where income tax may be payable.

The CESTAT has further held that the self-assessment of service tax need not be challenged in the appeal to claim refund of service tax paid wrongly.

The decision that the ITC (input tax credit) ruling will not apply to self-assessment under service tax, after analysing the difference in the provisions under the customs law and service tax law, is noteworthy and can be applied in similar situations where the revenue authorities challenge the refund, PwC said in note on CESTAT ruling.

The CESTAT order came in a case where the appellant entered into a partnership agreement with a partnership firm (firm), wherein the appellant is a partner with 96 per cent share. As a partner, the appellant provided services related to the promotion and marketing of the firm's product. The appellant paid service tax and interest towards the remuneration received from the firm for these services.

Upon realising that the services provided by a partner to a firm do not fall under the ambit of services as per Finance Act, 1994, the appellant filed refund claims, which were rejected. The appellant preferred an appeal before the CESTAT seeking for refund of the service tax paid.

The CESTAT held that partners and partnership firm cannot be treated as two distinct persons, since the same persons, who are partners in the firm, are individually called as partners and collectively called as firm. It said that the firm is not a different entity or person in law than its partners; it is merely an association of individuals, and a firm name is only a collective of those individuals who constitute a firm. As the activities carried out by the appellant for the firm are part of its duties as a partner, it cannot be said that the appellant partner and the firm have a relationship of service provider and service recipient.

In this arrangement, it cannot be said that the partner is a service provider and the firm a service recipient, CESTAT said rejecting the the revenue's contention to classify the service under business auxiliary service, since the appellant, being a partner, had discharged its duties pursuant to the partnership deed and held that all the activities performed by the appellant in the capacity of partner to the firm are not liable to service tax.

It held that remuneration paid to partners is a special share of profit and not consideration for service.