MCA Restricts Manufacturing Activities for Limited Liability Partnerships and Include Penalties

Highlights

  1. MCA puts a hold on LLPs to be a part of manufacturing and allied operations
  2. The MCA clarification comes along with the Penalty of about INR 100 per day
  3. The Institute of Company Secretaries of India (ICSI) has differed from MCAs decision

The Ministry of Corporate Affairs (MCA) recently elucidated that Limited Liability Partnerships cannot perform any sort of manufacturing  and allied operations. This has come as a surprise to some, while shock to many.

The MCA clarification comes along with the Penalty of about INR 100 per day for procrastination in filing and various issues faced in dissolution.

The government has received a number of representations over the past one year regarding the penalty issue from individuals who registered an LLP, but did not operate any business and intended to dissolve.

The MCA clarified this decision on the basis of the definition of ‘business’ under the LLP Act, 2008 that it enables LLPs to participate in trade, services, occupation, and profession. And ultimately excluded manufacturing and allied services from the definition.

“Under Section 2(1)(e), LLP Act defines that ‘business’ includes every trade, profession, service and occupation.”

The Tax Head of merger and acquisitions in Deloitte Haskins & Sells, Amrish Shah has differed from the MCA’s clarification. He stated 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.”

The Institute of Company Secretaries of India (ICSI) has the exact view as Amrish Shah. Here’s the ICISI’s letter to the MCA dated on April 8 –

“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

The ICSI’s letter stated that if there was any objective to keep manufacturing activities aside from the definition of business then there has to be an exclusive notification for it.

Amrish Shah indicated that until December 2018, the MCA listed out data on economic sector-wise classification of LLPs in its monthly reports, they would mention the amount 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, the Tax Head of merger and acquisitions in Deloitte Haskins & Sells

As per the MCA’s report in December, around 14,646 LLPs were performing manufacturing operations. Intriguingly, MCA discontinued to add the information on LLPs manufacturing activities for the Jan-Feb, 2019 reports.

LLP Companies Status

Girish Vanvari, Founder of business advisory firm Transaction Square, said “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. There’s also a legal debate on the validity of this internal ministry note and whether the same is open to challenge in courts.

Important Link:

  1. MCA’s Clarification Delivers Rude Shock To Limited Liability Partnerships

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