2016 (5) TMI 786 - AT - Service Tax

Director's Salary Not Subject to Service Tax: Tribunal Highlights Tax Inconsistency

M/s. Rent Works India Pvt. Ltd. Versus Commissioner of Central Excise, Mumbai-V

The Tribunal held that payments made to Mr. Alan Van Niekerk were considered salary to a director and not subject to service tax, overturning the demand ... Liability of Service tax - Nature of Amount paid to director - Salary of Management Consultancy Service - from 18-4-2006 till 31-10-2006 - Reverse Charge Mechanism - amount paid to Mr. Alan Van Niekerk (director) was running a proprietor ship concern also - Held that:- if an amount paid by the appellant to Shri Alan Van Niekerk is considered as a salary by the Income Tax Department, a branch of Ministry of Finance, Department of Revenue, it cannot be held by the Service Tax Department, another branch of Ministry of Finance, Department of Revenue, as amount paid for consultancy charges and taxable under Finance Act. The same department of Government of India cannot take different stand on the amount paid to the very same person and treat it differently. Therefore, the amount which is paid to Mr. Alan Van Niekerk, has to be treated as salary to the director and the salary is not to be considered as to fall under the category of “Management Consultancy Services” and liable for Service Tax. Impugned order set aside as unsustainable. - Decided in favour of appellant with consequential relief Issues:1. Service tax liability on payments to a foreign service provider.2. Interpretation of the nature of payments made to an individual.3. Discrepancy between Income Tax Department and Service Tax Department's treatment of payments.4. Determination of whether payments constitute salary or consultancy charges.Analysis:1. The appellant was engaged in manufacturing and received taxable services from a foreign service provider, leading to a demand for service tax from 2002-03 to 31-10-2006. The adjudicating authority dropped the demand for the period before 18-4-2006 but confirmed it for the subsequent period under the Reverse charge mechanism.2. The issue revolved around whether payments made to Mr. Alan Van Niekerk constituted salary or consultancy charges. The appellant argued that Mr. Alan Van Niekerk was a director and the payments were salary based on agreements, board minutes, and official records. The departmental representative contended that the invoices indicated consultancy charges and questioned the evidence provided by the appellant.3. The Tribunal examined the agreement with Mr. Alan Van Niekerk, finding it to be for management services with specified remuneration and additional amounts. The balance sheet indicated Mr. Alan Van Niekerk's directorship, supported by the Income Tax Department treating the payments as salary. The Tribunal emphasized the inconsistency between the Income Tax and Service Tax Departments' treatment of the same payments, concluding that the payments should be considered salary and not taxable under the category of 'Management Consultancy Services.'4. Ultimately, the Tribunal held the impugned order as unsustainable, setting it aside and allowing the appeal based on the determination that the payments to Mr. Alan Van Niekerk were salary to a director and not subject to service tax. The decision highlighted the importance of consistent treatment by different branches of the government on the taxability of payments made to individuals.