2019 (4) TMI 1595 - AT - Service Tax

Tribunal rules in favor of manufacturer on service tax dispute for remuneration to directors.

The Tribunal ruled in favor of the appellant, a manufacturer of Ferro Alloys, in a case concerning the demand of service tax on remuneration paid to whole ... Service tax under reverse charge mechanism - services rendered by employee excluded from levy of service tax - employer-employee relationship - whole-time director as employee and key managerial personnel under the Companies Act - deduction of tax at source under Section 192 of the Income Tax Act - penalty and interest not leviable where primary demand is set asideService tax under reverse charge mechanism - services rendered by employee excluded from levy of service tax - employer-employee relationship - whole-time director as employee and key managerial personnel under the Companies Act - deduction of tax at source under Section 192 of the Income Tax Act - Whether remuneration (including variable commission) paid to whole-time directors is liable to service tax under reverse charge or is to be treated as salary exempt from service tax - HELD THAT: - The Tribunal found on facts that the persons in question are whole-time directors, a status recognized by the Companies Act which treats a whole-time director as in whole-time employment and as key managerial personnel, and that such directors may be officers in default for company non-compliance. The characterisation as whole-time directors establishes an employer-employee relationship between the company and those directors. The assessee deducted TDS under Section 192 of the Income Tax Act treating the payments as salaries, and produced Form 26AS evidence of such TDS. The Tribunal held that the mere fact that remuneration includes a variable component in the form of commission does not negate the employment relationship or convert the payments into taxable services. Applying the principle that payments treated as salary by the Income Tax Department and subjected to TDS as salary cannot be recharacterised as consideration for a taxable service, the Tribunal relied on earlier tribunal decisions to reinforce that consideration paid to whole-time directors is remuneration in the nature of salary and not a taxable service. In view of these findings, the demand of service tax under reverse charge on remuneration paid to whole-time directors cannot be sustained. [Paras 6, 7, 8]Demand of service tax on remuneration paid to whole-time directors set aside; corresponding interest and penalty also unsustainable.Final Conclusion: The appeal is allowed: service tax demand for the period August 2012 to March 2013 on remuneration paid to whole-time directors is quashed, with consequential reliefs; interest and penalty are also set aside. Issues:Demand of service tax on remuneration paid to whole time directors under reverse charge mechanism.Analysis:The appellant, a manufacturer of Ferro Alloys, paid remuneration to its whole time directors, which included fixed and variable components. The Department raised a demand of service tax on this remuneration under reverse charge mechanism. The appellant contended that the remuneration to whole time directors, who are salaried employees, was subject to TDS under the Income Tax Act, and therefore, not liable to service tax. The appellant cited legal provisions, judicial decisions, and circulars to support their argument that payments to whole time directors should be treated as salaries and not subject to service tax.The Tribunal analyzed the definition of 'whole time director' under the Companies Act, recognizing them as employees entitled to remuneration. The Tribunal emphasized the employer-employee relationship between the company and whole time directors, stating that the variable pay structure does not alter this relationship. The Tribunal noted that the appellant had deducted tax under the Income Tax Act applicable to payments to employees, further supporting the argument that the remuneration to whole time directors should be considered as salaries.The Tribunal referred to legal precedents and statutory provisions to conclude that the demand of service tax on remuneration paid to whole time directors cannot be sustained. Citing previous judgments, the Tribunal held that payments to whole time directors should be treated as salaries due to the employer-employee relationship, and therefore, not subject to service tax. Consequently, the demand for service tax, penalty, and interest were set aside, and the appeal filed by the appellant was allowed with consequential relief as per law.