A partner’s use of intellectual property in the partnership is not a taxable service.

The four appellants were partners in M/s. Radhashyam Tirthabasi Paul, a bidi-manufacturing firm.

The “Shankha Bidi” trademark was registered in the names of partners Ananda Paul and Tirthabasi Paul, and the appellants claimed rights in it as co-owners.

The firm recorded royalty payments for use of the mark as expenditure, while distributing net profits among the partners in agreed proportions.

A show-cause notice alleged that the royalty represented consideration for an intellectual property service and demanded service tax for 1 July 2012 to 2014–15.

The adjudicating authority confirmed the demand, and the Commissioner (Appeals) upheld it.

The partners appealed, disputing both taxability and the invocation of the extended limitation period.

1. Whether royalty paid by the partnership firm to its partners for use of a trademark owned by them constituted a taxable intellectual property service, or instead an activity within the partnership relationship that did not create a service-provider/service-recipient relationship.

2. Whether the extended period of limitation was invocable in light of the royalty entries in the firm’s accounts and the appellants’ filing of periodic returns.

The Tribunal considered the service-tax levy on intellectual property services, which the appellants noted had been introduced from 10 September 2004; the judgment does not identify a specific statutory provision.

It relied on V. Subramaniam v. Rajesh Raghuvandra Rao, which explains that a partnership firm is not a legal entity distinct from its partners and that partners are co-owners of partnership property, and Malabar Fisheries v. CIT, which similarly holds that partnership assets belong jointly or commonly to the partners.

It also applied the reasoning in Mormugao Port Trust v. CCE, Goa (CESTAT Mumbai, appeal decided 6 June 2016): a partner’s contribution to the partnership’s business does not, without a distinct service and an agreed quid pro quo for that service, establish a taxable service relationship.

On limitation, the Tribunal applied the principle that suppression or intent to evade must be established to invoke the extended period.

The Tribunal examined the firm’s profit-and-loss account and balance sheet and found that royalty was recorded as expenditure, while net profit was separately distributed among the partners.

It treated the trademark as an asset of the partners deployed for the firm’s business, rather than as property licensed by an independent third party.

In light of the partnership principles and Mormugao Port Trust, it found no client–service-provider relationship or separate quid pro quo for a taxable service; the use of the mark furthered the partnership’s business and the partners’ shared interests.

On limitation, the royalty payments were disclosed in the accounts, and the Tribunal found no evidence of suppression or intent to evade tax.

It also noted that the firm had been audited and that any service tax paid by the partners would, in its view, have been available to the firm as Cenvat credit.

It additionally held that the extended-period demand was unsustainable because suppression had not been established.

The four appeals were allowed, with consequential relief, if any, in accordance with law.