Royalty Paid To Partners For Trademark Use Not Taxable Without Service Relationship: CESTAT Kolkata

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata, on 14 October held that royalty received by partners for allowing their partnership firm to use a jointly owned trademark does not attract service tax in the absence of a service provider-recipient relationship.

A Bench of Judicial Member R. Muralidhar allowed four appeals filed by the partners of Radhashyam Tirthabasi Paul against the confirmation of service tax demands on royalty received for the use of the trademark “Shankha Bidi”. It held:

“When the partner allows his assets to be used by the partnership firm, there arises no case of client – service provider relationship between the partnership firm and partner.”

The dispute arose from a show cause notice dated 16 March 2018, which alleged that royalty paid to the partners for the use of the trademark constituted an intellectual property service and attracted service tax from 1 July 2012 to the financial year 2014–15. The adjudicating authority confirmed the demand on 3 October 2018, and the Commissioner (Appeals) upheld the order.

The partners argued that they had inherited the trademark rights in proportionate shares. Under the partnership deed executed on 16 March 1994, Ananda Paul held a 50% share in the profits, while Barun Kumar Paul, Ratan Kumar Paul and Goutam Kumar Paul each held a 16.67% share.

They contended that they had deployed the trademark for the common benefit of the firm and that royalty payments between the partners and the firm could not be treated as consideration for a taxable service. They also argued that the demand was time-barred because the royalty payments appeared in the firm's books of accounts and the firm had regularly filed its returns.

The Revenue argued that the firm and its partners were separate entities and that the royalty received by the partners was liable to service tax.

After examining the profit and loss accounts and balance sheets, the Tribunal noted that the firm had recorded the royalty payments as expenditure and subsequently distributed profits among the partners in the agreed proportions. It observed that the partners had deployed their trademark rights to generate profits for the business, rather than licensing the trademark to the firm as third parties.

The Tribunal relied on the Supreme Court's decisions in V. Subramaniam v. Rajesh Raghuvandra Rao and Malabar Fisheries v. CIT, Kerala, which recognised that a partnership firm is not a distinct legal entity separate from its partners and that the firm's property belongs to the partners collectively.

It also relied on the Tribunal's decision in Mormugao Port Trust v. CCEST, Goa, which held that activities undertaken by a partner or co-venturer for the mutual benefit of a partnership or joint venture do not constitute services rendered by one person to another for consideration when the requisite service provider-recipient relationship is absent.

Applying these principles, the Bench held that the decision in Mormugao Port Trust squarely applied to the case. It said:

“It is not disputed that the partners are the co-owners of the Royalty rights, which happens to be their asset. They have deployed the same and are receiving Royalty as part of the consideration for deploying this asset. As has been held in the cited case, there is complete absence of service provider vis-à-vis service receiver relationship in this case...”

The Tribunal also accepted the partners' challenge to the extended period of limitation. It noted that the royalty payments were reflected in the firm's accounts and that the partners could bona fide believe that service tax was not payable in the absence of a service provider-recipient relationship. Finding no evidence of suppression, it held that the Revenue had failed to establish an intent to evade tax.

Further, the Bench observed that, even if the partners had been liable to pay service tax individually, the firm would have been entitled to claim the tax as CENVAT credit against excise duty on the finished bidi products. It observed:

“I also take a view that if at the Service Tax was payable by the appellants individually, the same would be accruing to the partnership firm itself as Cenvat Credit for payment of Excise Duty on their finished goods, Biris. Hence, there cannot be any intent to evade Service Tax payment.”

Accordingly, the CESTAT set aside the impugned order, allowed the four appeals and granted consequential relief, if any, in accordance with law.

For Appellants: H.K. Panday, Goutam Basu and Tapan Kumar Mitra, Advocate

For Respondents: B. Sanfui, Authorized Representative