The Central Excise and Service Tax Appellate Tribunal (CESTAT) has clarified that a partnership firm, as a distinct legal entity from its predecessor proprietorship concern, cannot be held liable for service tax demands based on a notice issued in the name of the proprietorship. The Tribunal set aside a demand of Rs. 69,70,727 for the financial years 2009-10 and 2010-11 due to the absence of a fresh show cause notice issued to the partnership firm after its formation.
Background & Facts
The Dispute
The dispute arose from a service tax assessment against M/s. Ajab Singh & Co., a business that transitioned from a sole proprietorship to a partnership firm. The proprietorship, owned by Mr. Ajab Singh, operated under the same name until 31.03.2009. Effective 01.04.2009, the business was restructured into a partnership firm, also named M/s. Ajab Singh & Co., with a new PAN and service tax registration (No. AKDPS2160CSD001 dated 04.03.2010). The Department initiated proceedings for the period 01.04.2006 to 31.03.2011, alleging non-payment of service tax on construction services rendered to the Delhi Development Authority (DDA).
Key Facts
- The proprietorship concern was registered under the taxable category of 'Renting of Immovable Property Services' on 04.03.2010.
- The partnership firm was legally constituted on 01.04.2009, with separate registration, PAN, and business operations.
- The Department issued a Show Cause Notice (SCN) dated 19.10.2011 addressed to 'M/s. Ajab Singh & Co. (Proprietor, Mr. Ajab Singh)' for the entire period 2006-2011.
- The SCN did not distinguish between the proprietorship (pre-01.04.2009) and the partnership firm (post-01.04.2009).
- The adjudicating authority confirmed a total demand of Rs. 6,20,70,392/-, including interest and penalties under Sections 76, 77, and 78 of the Finance Act, 1994.
- The assessee appealed to CESTAT, which, by Final Order No. 58122/2013 dated 23.10.2013, remanded the matter for fresh adjudication, observing that a single SCN against two distinct legal entities was not executable.
- The Commissioner, on remand, issued the impugned Order-in-Original dated 27.03.2018, bifurcating the demand: Rs. 25,99,345/- against the proprietorship and Rs. 69,70,727/- against the partnership firm.
- The partnership firm was not issued a separate SCN for the post-2009 period.
- The Department confirmed service tax liability on construction of EWS houses, community halls, fruit and vegetable stalls, and other works, but dropped Rs. 5.14 crore on grounds of exemption for roads, boundary walls, and other non-commercial structures.
- The assessee admitted and paid Rs. 34,54,868/- for EWS house construction, which was appropriated in the order.
Procedural History
- 01.04.2006 to 31.03.2011: Period under investigation for service tax liability.
- 04.03.2010: Service tax registration obtained under proprietorship name.
- 01.04.2009: Proprietorship converted into partnership firm.
- 19.10.2011: Show Cause Notice issued to 'M/s. Ajab Singh & Co. (Proprietor, Mr. Ajab Singh)' covering entire period.
- 29.01.2013: Order-in-Original confirmed entire demand of Rs. 6.20 crore.
- 23.10.2013: CESTAT remanded the case, holding that single SCN against two entities was not executable and directed issuance of separate notices.
- 06.02.2018: Fresh hearing conducted by Commissioner.
- 27.03.2018: Impugned Order-in-Original bifurcated demand but did not issue fresh SCN to partnership firm.
- 08.12.2025: Hearing before CESTAT.
- 01.04.2026: Final Order passed.
The Parties' Positions
Assessee (M/s. Ajab Singh & Co. - Partnership Firm): Argued that the partnership firm is a distinct legal entity with separate PAN and registration. No SCN was issued to it for the period post-01.04.2009. The demand against it is void ab initio. Relied on Aksh Technologies Limited v. Commissioner of Central Excise & Service Tax, Jaipur and the Tribunal’s own remand order.
Revenue (Commissioner of CGST): Contended that business continuity establishes liability across entities. The SCN was issued to the proprietor, who is the same person behind both entities. Relied on Commissioner of Central Excise v. Flock (India) Pvt. Ltd. and Commissioner of Central Excise v. Mahaan Diaries to argue that change in legal form does not extinguish liability.
Relief Sought
Assessee: Quash the demand of Rs. 69,70,727/- for 2009-10 and 2010-11 against the partnership firm, as no SCN was issued to it.
Revenue: Uphold the entire demand, including the partnership firm’s liability, and challenge the exemption granted for boundary walls, sports complex, landscaping, and TDS exclusion.
The Legal Issue
Can a service tax demand be sustained against a partnership firm for services rendered after its formation, when the Show Cause Notice was issued solely in the name of the erstwhile proprietorship concern, and no separate notice was issued to the partnership firm despite a prior Tribunal order directing the issuance of fresh notices?
Arguments Presented
For the Appellant/Petitioner
The assessee argued that a proprietorship and a partnership firm are distinct legal entities under Indian law. A proprietorship has no separate legal personality from its owner, while a partnership firm is a separate assessable unit with its own PAN and registration. The Tribunal’s remand order explicitly held that a single SCN against both entities was not executable and granted liberty to issue separate notices. The Department failed to comply with this directive. The demand against the partnership firm for 2009-10 and 2010-11 was therefore void for want of due process. The assessee further contended that the SCN was vague, lacked proper classification of services, and failed to specify the taxable category under the Finance Act, 1994, thereby violating principles of natural justice.
For the Respondent/State
The Revenue contended that the proprietor and the partnership firm are economically the same entity, and liability follows the business continuity. The SCN was issued to 'M/s. Ajab Singh & Co.' and addressed to Mr. Ajab Singh as proprietor, thereby covering both phases. Reliance was placed on Flock (India) Pvt. Ltd. and Mahaan Diaries to argue that legal restructuring does not absolve liability. The Revenue further submitted that the assessee participated fully in the remand proceedings and had ample opportunity to defend itself, thereby curing any procedural defect.
The Court's Analysis
The Tribunal carefully examined the nature of the two entities and the procedural compliance mandated by its own remand order. It observed that while Flock and Mahaan Diaries dealt with group company exemptions and brand usage, they did not address the fundamental legal distinction between a proprietorship and a partnership firm. The Tribunal emphasized that a partnership firm is a separate assessable unit under the Finance Act, 1994, with its own registration, PAN, and statutory obligations.
"The Tribunal went on to give liberty to the Department to issue a fresh notice. We note that the impugned order in Para 4.1.4 has recorded the said direction... there is nothing on record to indicate that a fresh show cause notice was issued addressed to the partnership firm, in compliance to the Tribunal’s remand order."
The Tribunal held that the Department’s failure to issue a separate SCN to the partnership firm rendered the demand against it legally unsustainable. It invoked the principle of judicial discipline, citing Union of India v. Kamalakshi Finance Corporation Limited, to underscore that subordinate authorities must strictly comply with appellate directions.
Regarding the classification of services, the Tribunal upheld the demand for construction of the community hall and fruit and vegetable stalls, finding them to be commercial in nature. It rejected the assessee’s claim of exemption under Notification No. 25/2012-5T, noting that the DDA engages in commercial activities and the burden of proving non-commercial use lay with the assessee, which was not discharged.
On the issue of TDS, the Tribunal relied on Hindustan Oil Exploration Co. Ltd. and TVS Motor Company, holding that TDS deducted under income tax law is a statutory obligation and not part of the consideration for services. Similarly, refundable security deposits were held not to form part of taxable value under Section 67 of the Finance Act, 1994.
For boundary walls and sports complexes, the Tribunal applied the 'primary purpose' test, citing Laing Simplex JV and B.J. Shirke Construction Technology Pvt. Ltd., and held that construction for public use, even if incidental commercial facilities exist, is exempt if the primary intent is non-commercial. Landscaping for Commonwealth Games participants was similarly held exempt.
The Verdict
The assessee’s appeal was allowed in part, and the Revenue’s appeal was dismissed. The demand of Rs. 69,70,727/- for the financial years 2009-10 and 2010-11 against the partnership firm was set aside for want of a fresh show cause notice. The demand of Rs. 14,07,814/- for the community hall and Rs. 68,335/- for 200 fruit and vegetable stalls was upheld. The demand for EWS house construction was partially upheld, with liberty granted to the Revenue to verify the Rs. 34,54,868/- payment made by the assessee against its actual tax liability. The Department’s appeal against the exclusion of TDS, security deposits, boundary walls, sports complex, and landscaping was dismissed.
What This Means For Similar Cases
Separate Legal Entities Require Separate Notices
- Practitioners must ensure that service tax notices are issued to the correct legal entity as per its registration status at the time of service provision.
- A change in business structure (proprietorship to partnership, LLP, or company) necessitates a fresh SCN addressed to the new entity.
- Failure to issue a fresh SCN after a Tribunal remand order renders the demand void, regardless of business continuity.
Classification and Exemption Burden Are Critical
- Taxpayers must proactively classify services under the correct taxable category in their submissions.
- The burden of proving exemption under notifications (e.g., for public infrastructure) lies with the assessee; mere assertion is insufficient.
- For works contracts, the 'primary purpose' test governs exemption eligibility - incidental commercial use does not override non-commercial intent.
TDS and Security Deposits Are Excluded from Taxable Value
- TDS deducted under income tax law cannot be added to the gross amount charged for service tax.
- Refundable deposits, retainers, or security amounts are excluded from taxable value under Section 67(1)(a) of the Finance Act, 1994.
- Practitioners should clearly document the nature of payments in contracts to avoid disputed inclusions.
