MCA’s Clarification Delivers Rude Shock To Limited Liability Partnerships
LLPs cannot carry out manufacturing activities, MCA says
A recent clarification by the Ministry of Corporate Affairs has perturbed businesses structured as limited liability partnerships, with the ministry clarifying that they can't carry out manufacturing and allied activities. Experts told BloombergQuint that this interpretation has come as a surprise.
The ministry has relied on the definition of ‘business’ under the LLP Act, 2008, to say that it allows LLPs to carry out trade, profession, services and occupation. And that manufacturing and allied services have been positively excluded from this definition.
Section 2(1)(e), LLP Act states that ‘business’ includes every trade, profession, service and occupation.
Amrish Shah, tax head of merger and acquisitions at Deloitte Haskins & Sells, disagreed. He said that as per the definition, business includes every trade, profession, service and occupation. The word used is including, so the activities mentioned are illustrative and not an exhaustive definition, he said.
The Institute of Company Secretaries of India, in a representation to the ministry on April 8, has also taken the same view. It has noted that when there's a statutory definition, it can be exhaustive as well as inclusive. BloombergQuint has reviewed a copy of the institute’s letter to the ministry.
Exhaustive definition means that all the items are enumerated, and none is left for imagination. Inclusive definition, on the other hand, gives a general description or the name of what is covered by the definition and thereafter by a specific inclusion mentions certain items that may not be strictly inside the scope of the general description.ICSI’s letter to Ministry of Corporate Affairs dated April 8
If there was any intention to exclude manufacturing activities from the definition of business, there has to be a notification, the institute’s letter said.
Shah pointed out that until December 2018, the ministry in its monthly reports put out data on economic sector-wise classification of LLPs—they would specify the number of active manufacturing LLPs.
What does this indicate? It was fine to have an LLP engaged in manufacturing. Form number 8 (Statement of Account & Solvency) also has a specific mention about disclosure for ‘Sale of goods manufactured’. It would be ideal to restore the eligibility of LLP to engage in manufacturing operations.Amrish Shah, Partner, Deloitte Haskins & Sells
Nearly 14,646 LLPs are carrying out manufacturing activity, as per the ministry’s report in December. Curiously, the ministry’s reports for January and February, 2019 did away with the section that disclosed information on LLPs.
The industry has been informally given to understand from the ministry’s officials that existing LLPs carrying out manufacturing and allied activities will not be touched and allowed to continue with their operations but new manufacturing businesses seeking registration as LLPs won’t, Girish Vanvari, founder of business advisory firm Transaction Square, said. There's also a legal debate on the validity of this internal ministry note and whether the same is open to challenge in courts, he said.