Remuneration Paid To Whole-Time Directors Treated As 'Salary'; Service Tax Not Leviable: CESTAT Chennai

The Chennai Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) held that remuneration paid to whole-time directors does not constitute a taxable service. Consequently, service tax under the reverse charge mechanism (RCM) is not leviable. P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) opined that the remuneration paid to the Directors constitutes “salary” under an employer–employee relationship and is therefore not exigible to service tax. In the case at hand, the assessee/appellant paid remuneration to three persons who acted as directors/chairman of the company. It was alleged that the assessee had not discharged service tax liability under reverse charge on remuneration paid to the directors. A show-cause notice was issued to the assessee demanding service tax on account of non-payment of service tax under the reverse charge mechanism (RCM) in respect of remuneration paid to three directors/chairman. The adjudicating authority confirmed the demand made in the show cause notice and concluded that the payments to the Chairman/Directors constituted taxable “services” and, being services provided by directors to the company, the company was liable to pay service tax under RCM. As per the assessee, where a director is a whole-time employee and payments are treated as salary (with TDS/EPF etc.), that payment is excluded from “service” under Section 65B(44)(b) of the Finance Act 1994 and is not taxable under the RCM Notification. The assessee further submitted that RCM applies only to a taxable service. If the payments are “salary” (excluded under Section 65B(44)(b)), there is no taxable service, and therefore Notification No.30/2012-ST has no application. The Revenue argued that the payments are in the nature of “remuneration” to directors and that the assessee failed to establish employer employee relationship. The Notification 30/2012-ST was correctly invoked because the assessee received services from directors and is the recipient in terms of Rule 2(1)(d)(i)(EE), irrespective of the label attached by the assessee. The Tribunal stated that the Directors were functioning strictly in the capacity of employees. The remuneration paid to them therefore falls squarely within the exclusion clause in Section 65B(44)(b), and consequently cannot be regarded as consideration for a taxable service. The bench held that the payments were salary paid in the course of employment and not consideration for an independent service; there is no taxable service, and consequently, RCM cannot be invoked. The Revenue's reliance on the mechanical application of Notification 30/2012-ST without first establishing that a taxable service was rendered is contrary to logic and the statutory exclusion in Section 65B(44)(b), added the bench. In view of the above, the Tribunal allowed the appeal. Case Title: M/s. Agni Steels Pvt. Limited v. Commissioner of GST and Central Excise Case Number: Service Tax Appeal No. 41254 of 2016 Counsel for Appellant/ Assessee: S. Venkatachalam Counsel for Respondent/ Department: M. Selvakumar Click Here To Read/Download Order

Remuneration Paid To Whole-Time Directors Treated As 'Salary'; Service Tax Not Leviable: CESTAT Chennai

Mehak Dhiman

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