Directors' commission treated as salary not liable for service tax under reverse charge mechanism

CESTAT Ahmedabad held that service tax under reverse charge mechanism was not leviable on commission paid to Directors treated as salary in company books. The tribunal ruled that services provided by Directors as employees fall outside the definition of "service" under Section 65B(44)(b) of Finance Act, 1994, as these constitute employer-employee relationships. The payment was booked as salary with TDS deducted under Section 192 of Income Tax Act, supporting employment status. CBEC Circular No. 115/9/2009-ST clarified such Director commissions don't constitute Business Auxiliary Service. The impugned order was set aside and appeal allowed.

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Issues Involved:
1. Whether the appellant is required to pay service tax under the reverse charge mechanism on the commission paid to Directors, which was treated as part of salary in the books of accounts and TDS deduction.

Detailed Analysis:

1. Nature of Commission Paid to Directors:
The primary issue is whether the commission paid to Directors should be treated as salary or as a service subject to service tax under the reverse charge mechanism. The appellant argued that the commission paid to the Directors is part of their salary, as it was booked as salary in the accounts and TDS was deducted under Section 192 of the Income Tax Act, 1961. The appellant referenced the 26AS Certificate, showing the payment as salary. The commission was a percentage of the company's profit.

2. Legal Precedents and Board Circular:
The appellant cited several judgments and a Board Circular (No. 115/9/2009-S.T., dated 31-7-2009) to support their claim that the issue is no longer res-integra. The Board Circular clarified that payments to Managing Directors/Directors, even if termed as commission, are not within the scope of business auxiliary service and hence not subject to service tax. The Circular also distinguished between management functions performed by Directors and consultancy services, stating that remuneration for management functions is not taxable under management consultancy service.

3. Tribunal's Findings:
The Tribunal considered the submissions and perused the records. It noted that under Section 65B(44) of the Finance Act, 1994, services provided by an employee to an employer in the course of employment do not fall under the definition of service. The Tribunal found that the Directors, as per the Board's resolution, were employees of the company. The commission paid was in the course of their employment and thus not taxable as a service.

4. Supporting Judgments:
Several judgments were cited to support the Tribunal's decision:
- Bengal Beverages Pvt. Ltd. vs. CGST & Excise, Howrah: The Tribunal held that remuneration in the form of commission to whole-time Directors, who are considered employees, is not subject to service tax.
- Gujarat Guardian Ltd. vs. CCE, Bharuch: The Tribunal reiterated that whole-time Directors are employees, and remuneration paid to them is not taxable as a service.
- Ratnamani Metals And Tubes Ltd. vs. CCE, Ahmedabad-III: The Tribunal found that Directors appointed as employees of the company, with remuneration treated as salary, are not liable for service tax under the reverse charge mechanism.
- Maithan Alloys Ltd. vs. CCE, Bolpur: The Tribunal concluded that whole-time Directors, being key managerial personnel and employees, are not subject to service tax on their remuneration.

5. Conclusion:
The Tribunal concluded that the commission paid to the Directors by the appellant company does not fall under the definition of service as per Section 65B(44) of the Finance Act, 1994, and is not liable to service tax. The appeal was allowed, and the impugned order was set aside.

Pronouncement:
The judgment was pronounced in the open court on 26.09.2024.

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