CESTAT Delhi Rules on Service Tax Payment Through Partner's PAN: Adjustment Against Firm's Liability Permitted
Background of the Dispute
The dispute originated from an Order-in-Original dated 28.05.2020 whereby the adjudicating authority confirmed a substantial service tax demand amounting to ₹2,83,27,069 accompanied by interest under Section 75 of the Finance Act, 1994. Additionally, penalties of ₹10,000 each were imposed under Sections 77(1) and 77(2), along with an equivalent penalty under Section 78 of the Finance Act, 1994.
The assessee, Deepa Construction, operated as a partnership firm since its establishment in 2004. The firm was primarily engaged in rendering construction services and executing works contract assignments for various clients including NDMC, TRF Ltd, Dee Tech Project Ltd, and Tecpro Systems Ltd. The controversy arose when departmental scrutiny of TDS and Income Tax Return data for the financial years 2013-14 and 2014-15 revealed alleged non-payment of service tax obligations.
Departmental Investigation and Show Cause Notice
The investigation commenced when the Department discovered through TDS/ITR data examination that the firm had received substantial amounts - ₹5,00,11,867 during 2013-14 and ₹7,59,27,497 during 2014-15 - towards providing taxable services. Subsequently, a letter dated 01.10.2018 was dispatched to the assessee requesting submission of complete details regarding service tax payments along with supporting documentation and exemption claims. The assessee failed to respond to this communication.
Following completion of the inquiry proceedings, a show cause notice dated 17.10.2018 was issued proposing a demand of ₹1,55,66,105 along with applicable interest and penalties under Sections 76, 77, and 78 of the Finance Act, 1994. An addendum was subsequently issued vide F.No.V(ST)15-339/ADC/RPR/2018/ADJ/4088 dated 18.04.2019 covering the extended period of 2015-16, 2016-17 and 2017-18 (until June 2017), demanding an additional service tax amount of ₹1,27,60,964 including cess.
Core Issue: Service Tax Payment Through Partner's Registration
The central controversy in this matter revolved around the fact that service tax payments had been made using the service tax registration obtained under the PAN of Shri K. Surendran Nair, who was a partner in the firm, rather than under the partnership firm's own registration. The adjudicating authority viewed this as a fundamental defect and confirmed the entire demand primarily on this ground.
Assessee's Contentions
The assessee raised several substantive arguments in their defense:
The firm had been consistently utilizing the same service tax registration since 2005, which had been obtained on the partner's PAN following guidance from departmental officials at that time. The assessee emphasized that despite continuous usage of this registration for over a decade, the Department had never raised any objection or disputed the registration mechanism. All ST-3 returns and tax payments made during previous years had been accepted by the Department without question.
The assessee argued that partnership firms and their partners do not constitute separate and distinct legal entities under law. Given that partners' liability in a partnership is unlimited, any service tax payment made through a partner's registration should legally discharge the firm's obligation. The assessee contended that if the partnership firm fails to discharge its liabilities, the burden automatically falls upon the partners themselves, making them collectively responsible for all acts of the partnership firm.
Department's Stand
The Department maintained that the partnership firm and individual partner constituted two separate and distinct entities. The adjudicating authority concluded that there existed no legal provision permitting adjustment of service tax paid under an incorrect registration code to the correct registration code. Furthermore, evidence indicated that Shri K. Surendran Nair had also been independently providing taxable services to various clients including Shree Nakoda Ispat Ltd, Drolia Electrosteels P Ltd, D.B.Corp Ltd, Shivalay Ispat & Power Ltd, and API Ispat & Powertech Ltd, as reflected in TDS Form-26AS records.
Tribunal's Analysis on Partnership Firm and Partners
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi undertook a comprehensive examination of the legal position regarding partnership firms and their partners. The Tribunal drew attention to Section 4 of the Partnership Act, 1932, which defines the relationship between partners and establishes that persons who have entered into partnership are called individually "partners" and collectively a "firm."