2019 (4) TMI 1537 - AT - Service Tax

Tribunal Upholds Decision on Service Tax Liability for Directors' Remuneration

The Tribunal upheld the lower authorities' decision, dismissing the appellant's appeal regarding the liability of service tax on remuneration paid to ... Service Tax on directors' remuneration - Employer-employee relationship - Hiring and firing as determinative test for employment - Reverse charge liability of recipientService Tax on directors' remuneration - Employer-employee relationship - Hiring and firing as determinative test for employment - Reverse charge liability of recipient - Whether the remuneration paid to whole time directors constituted taxable 'services' such that service tax was payable, having regard to whether an employer employee relationship existed between the company and the directors. - HELD THAT: - The Tribunal examined the ledger entries, the Chartered Accountant's certificate, the board minutes and the appointment letters. The ledger showed quarterly accounting of remuneration rather than month to month payments; the CA certificate asserted monthly salary treatment and the directors had shown the payments as 'salary' in their Income Tax Returns with TDS deducted. However, the Tribunal held that to establish an employer employee relationship for the purpose of excluding the payments from taxable 'services', the company resolutions and terms must expressly incorporate both the terms of engagement and the power of termination ('hiring and firing'). In the absence of such provisions and given the deviation in mode of accounting, the Tribunal was not persuaded that the payments were the remuneration of employees rather than consideration for services rendered by the directors. The Department's case that service tax is leviable on services provided by directors and that the recipient is liable under the reverse charge mechanism was accordingly sustained as the appellant failed to establish the required employer employee relationship. [Paras 7]The impugned order confirming service tax liability on the directors' remuneration for the periods under dispute is sustained and the appeal is dismissed.Final Conclusion: The Tribunal upheld the demand of service tax on the directors' remuneration for Financial Years 2012 13 and 2013 14, finding that the appellant failed to establish an employer employee relationship (notably the requisite 'hiring and firing' clause and month to month payment practice); the appeal was dismissed and the adjudication confirmed. Issues:1. Liability of service tax on remuneration paid to directors.2. Establishment of employer-employee relationship between company and directors.Analysis:1. The case involved a dispute regarding the liability of service tax on remuneration paid to directors of the appellant company. The Department alleged that service tax is leviable on the services provided by directors to the company as per relevant notifications and provisions. The Adjudicating Authority confirmed a demand of &8377; 26,40,000/- paid as remuneration to directors, along with service tax and penalties. On appeal, the Learned Commissioner modified the order, confirming the service tax demand only on director's remuneration for specific financial years, reducing the amount to &8377; 12 Lakhs, leading to the appeal before the Tribunal.2. The appellant contended that a circular by CBSE clarified that the mode of payment to directors does not alter the employer-employee relationship. The Tribunal examined the ledger copy of director's remuneration, which showed payments on a quarterly basis, unlike the usual monthly basis. The appellant submitted a certificate from a Chartered Accountant affirming the whole-time director status of certain individuals and the monthly payment of remuneration. However, the Tribunal emphasized the importance of establishing a clear employer-employee relationship, including terms of appointment, duties, termination clauses, and monthly payment of remuneration with perquisites. It noted discrepancies in the case, such as the deviation from standard practices and the directors being categorized as employees in income tax returns.In conclusion, the Tribunal upheld the lower authorities' decision, dismissing the appellant's appeal. The judgment highlighted the necessity of a robust employer-employee relationship framework to determine the nature of remuneration paid to directors and emphasized adherence to standard practices and legal requirements in such matters.