1. Introduction
Partnership transactions (viz., transactions between firm and its partners) were not liable to service tax under the law existing prior to 1-7-2012, as the same were not specified taxable services under section 65(105) of the Finance Act, 1994. Under the present law, section 65B(44) of the Finance Act, 1994 defines 'service'
to mean 'any activity' carried out by 'a person' for 'another' for 'consideration'. Section 66D(e) provides that agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act would be a declared service. Thus, a question generally arises as to leviability of service tax on partnership transactions.
2. Scope of word 'Activity' used in section 65B(44)
The word 'activity' has not been defined in the Act, but in terms of the common understanding, it includes an act done, a work done, a deed done, an operation carried out, execution of an act, provision of a facility, etc.
3. Whether admission of a partner in a firm is a service provided to him and whether, therefore, capital contributed by new partner would be liable to service tax ?
3.1 By admitting a new partner no service is provided
Section 5 of the Indian Partnership Act, 1932 declares that the relationship of partnership arises from a contract. Thus, the entry of a new partner in a partnership is the result of a contract between the existing partners and the new partners. Admission into partnership is not an 'act/work done' or 'facility provided' : neither by the firm nor by the partners. The sacrifice, if any, is made by the existing partners, however, the sacrifice/admission is not for the benefit of any existing/new partner but is for the benefit of the objectives of the partnership. Thus, by admitting a new partner in the firm, no "service" is provided to the "new partner". The new partner is merely acquiring a financial holding/interest in the firm.
3.2 In admission of a new partner no service is involved
Service Tax is a destination-based consumption tax. By admission of a new partner in the firm, there is no consumption by the new partner. Hence, there is no question of any 'service' being involved.
3.3 Capital contributed by new partner cannot be regarded as a 'consideration'
Viewed from another angle, the capital contributed by the new partner in the firm is not a 'consideration' because 'consideration' flows from the 'service receiver' to the 'service provider' and belongs to the service provider. The capital contribution of the new partner continues to belong to him and is returned to him whenever he retires. The capital contribution never belongs to the 'firm'. Thus, capital contribution cannot be regarded as a "consideration" for any service.
3.4 Similar view under European VAT law
A similar view was held under the European VAT law in the judgment rendered by the European Court of Justice in KapHag Renditefonds 35 Spreecenter Berlin-Hellersdorf 3. Tranche GbR v. Finanzamt Charlottenburg [2012] 36 STT 125/22 taxmann.com 173.
4. Interest on capital, remuneration and share in profit, etc., received by a partner cannot be charged to service tax
4.1 Sharing of profits is not for provision of any service
The question of charge of service tax arises when there is service provided by one person to another. The partners act according to the objectives of the partnership and work together to achieve common good. The remuneration, interest on capital, etc., are methods of sharing of profits earned by the firm and are not for provision of any service by the partner to the firm. The same arises by virtue of ownership of share in the firm by the partner. Hence, it is not liable to service tax.
4.2 Explanation 3(a) to section 65B(44) does not apply to firm and partners thereof
The Explanation 3(a) to section 65B(44) provides that an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons. Section 65B(37) defines "person" to include 'a firm' in sub-clause (vi) thereof and 'an association of persons or body of individuals, whether incorporated or not' in sub-clause (vii) thereof. Therefore, 'firm' and 'association of persons or body of individuals' are different persons under the service tax law. It follows, therefore, that Explanation 3(a) to section 65B(44) applies only to unincorporated association or a body of persons and not to 'a firm' and partners thereof. Thus, even if the activities carried out by a partner for the benefit of the firm are services provided to the firm, then also, these are 'SELF-SERVICES', as firm and partners are not regarded as 'distinct person' under Explanation 3(a) to section 65B(44). Hence, the same are not liable to service tax.
4.3 'Firm' is a collective name given to 'partners'
As per the Indian Partnership Act, 1932, 'firm' is a collective name given to the 'partners'. Therefore, even under the partnership law, firm and its partners are not separate persons. Hence, there can't be any question of charge of service tax on remuneration, etc.
4.4 Provisions of IT Act and Service-tax law deem remuneration differently
The charge of income-tax on remuneration, etc., received by partners from the firm is because section 2(24), read with section 28 of the Income-tax Act, 1961 deems such sums as income; while, there is no such provision under the service tax law. Even in that view of the matter, there can't be any levy of service tax on remuneration, etc.
Neutrality between forms of organization
5. It must be noted that 'securities' have been included in 'goods' under section 65B(25) and 'sale of goods' is not 'service' as defined in section 65B(44). Therefore, sale of securities is not liable to service tax. Thus, in case of 'company' mode of an organization, transactions in securities and dividend arising therefrom (which are financial transactions) are not liable to service tax, accordingly, to maintain neutrality in form of organization, similar financial transactions by way of capital contribution and remuneration, etc., arising therefrom should not be liable to service tax.
Conclusion
6. Under the present law, capital contributed by a partner in the partnership firm and remuneration, etc., arising therefrom are not liable to service tax.
· Remuneration to partners in a partnership firm liable to service tax
Question -
Remuneration to diectors has been made liable to service tax under reverse charge mechanism. What is the status of remunerastion paid to partners by partnership firm? What is the status of remuneration paid to partners in case of LLP. Whether body corporate includes Limited Liability Partnership as well?
Answer
Issue reg remuneration to partners debatable but in my view firstly it is share of profit - alternate agrement is that there is employer emploee relation by a deeming fiction LLP is surely body corporate but remuneration to partners of LLP is not covered under reverse charge Even in cse of companies, only sitting fees and commission to non-executive directors is under reverse charge - if director is employee, then no quesion of service tax at all –
Service tax on Hostel Mess Run by private contractor
Question -
Respected Sir, Person is providing Morning Tea,Break fast ,Lunch,& Dinner to resident students in hostel run by educational institution-say as Mess Hall for prepartion,eating hall ( Non AC with only veg food without alcoholic bevarage) along with all equipments is provided by educational institution. Prior to negative list he is paying service tax under catering services with abetment@50%. Now as per new abetment notifiaction tax is to be paid @70% & along with catering renting is one service where as in above case there is no renting by service provider or say contractor. As per mega exemption notification dated 20/06/12 under clause 19 follwing service is exempt "Services provided in relation to serving of food or------,or a mess ,other than those having i) ac facilitie ii) licence to serve alcoholic beverages." In the light of above a)Whether service is taxable if yet tax to be paid on 70% or on 100% ????? b)If not atxable whether under cl 19 of mega notification??
Answer-
In my view, no service tax is payable –
· Out Door catering and food service in eating house
Question
With referance to my queery dated 16/08/2012 where mess contractor is giving morning tea,breakfast,lunch,dinner in Eductaional institute hostel where eating hall (Non AC without alacoholic licence)as well as food prepartaion place & equipment is provided by educational institution. Previously it is trated under outdoor catering but now as there is no defination of outdoor catering but valuation rule speks about outdoor catering. In view of above whether said activity can cover under s no 19 of Mega exemption notification or as outdoor catering though same not defined now but referance is there in valuation rule & old section 65(76a) is deleted wef 01/07/2012.
Answer -
Old section is not relevant after 1-7-2012 - the service is not taxable due to exemption.
· Service tax on Dirctors remuneration by hospital
Question -
Respected sir, , A private limited company is running a hospital. Directors in this company are all doctors and have their own separate medical practice and visiting other hospitals as well.They are also paid remuneration from the company. Since these directors are also running their individual clinics and are visiting consultants of other hospitals,whether this fact can create difficulty in the claim that there is employer-employee relationship between company and directors and hence service tax is not payable. What is your opinion?
Answer-
Actually employer can allow employee to do some work in their spare time - if u want u can pass resolution in that way - fo course u should have proper employee agreement with the directors.
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