Directors' remuneration including salary and profit commission exempt from service tax under reverse charge mechanism

CESTAT Ahmedabad held that remuneration paid to company directors, including salary, allowances, and profit commission, is not liable to service tax under reverse charge mechanism. The tribunal noted that TDS was deducted under Section 192 of Income Tax Act and Form 16 issued, indicating the payments constituted salary to employees rather than taxable services. Following precedents in Allied Blenders and Supreme Treves cases with identical facts, CESTAT set aside the demand and allowed the appeal, ruling director remuneration exempt from service tax liability.

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Issues Involved:

1. Whether the appellant is liable to pay Service Tax under the reverse charge mechanism on the remuneration paid to the directors of the appellant's company.
2. Whether the remuneration paid to the directors qualifies as a service under the Finance Act, 1994.
3. Whether the remuneration paid to directors is subject to Service Tax under the Business Auxiliary Services or Management Consultancy Services.

Issue-wise Detailed Analysis:

1. Liability to Pay Service Tax on Directors' Remuneration:

The primary issue is whether the appellant is liable to pay Service Tax under the reverse charge mechanism on the remuneration paid to the directors. The appellant argued that the remuneration, which includes salary, allowances, and commission on profit, was paid under Section 192 of the Income Tax Act, and TDS was deducted accordingly. The appellant relied on several judgments and board circulars to assert that such remuneration is not liable for Service Tax. The tribunal noted that the remuneration paid to directors was treated as salary under the Income Tax Act, with TDS deducted and Form 16 issued, indicating an employer-employee relationship. The tribunal concluded that the remuneration is not liable to Service Tax, as it falls within the exclusion of services provided by an employee to an employer under Section 65B(44) of the Finance Act, 1994.

2. Definition of Service under the Finance Act, 1994:

The tribunal examined whether the remuneration paid to directors constitutes a service under the Finance Act, 1994. The definition of "service" excludes any provision of service by an employee to an employer in the course of employment. The tribunal considered the nature of the relationship between the company and its directors, noting that the directors were appointed as whole-time directors and employees of the company. The tribunal referred to the Supreme Court judgment in Ram Pershad v. CIT, which emphasized the employer-employee relationship based on control and supervision by the employer. The tribunal found that the directors were employees of the company, as evidenced by their appointment under the Companies Act and the Articles of Association, as well as the deduction of Provident Fund contributions and issuance of Form-16, thus falling outside the scope of "service" under the Finance Act.

3. Applicability of Service Tax under Business Auxiliary Services or Management Consultancy Services:

The tribunal also addressed whether the remuneration paid to directors could be classified under Business Auxiliary Services or Management Consultancy Services. The tribunal referred to a board circular which clarified that payments made to directors, even if termed as commission, do not fall within the scope of Business Auxiliary Services and are not liable for Service Tax. The circular further clarified that directors, being part of the Board, perform management functions rather than consultancy or advisory functions, and therefore, payments to directors are not chargeable to Service Tax under Management Consultancy Services. The tribunal concluded that the remuneration paid to directors is not subject to Service Tax under either category, and the appellant is entitled to Cenvat Credit for the Service Tax paid on such remuneration.

Conclusion:

The tribunal set aside the impugned order, holding that the remuneration paid to directors does not attract Service Tax under the reverse charge mechanism. The tribunal allowed the appeal, emphasizing that the remuneration qualifies as salary and falls within the employer-employee relationship, thus not constituting a taxable service under the Finance Act, 1994. The tribunal's decision aligns with previous judgments and board circulars, reinforcing the non-applicability of Service Tax on directors' remuneration treated as salary.

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