Director's commission based on company profits exempt from service tax under reverse charge mechanism

CESTAT Ahmedabad held that director's remuneration in the form of commission based on company profits is not liable to service tax under reverse charge mechanism. The tribunal found that amounts paid to directors as remuneration for their directorial duties, whether as salary or profit-based commission with TDS deducted, do not attract service tax liability. Following precedent in Alchemie Organics case, the tribunal clarified that compensation to managing directors/directors for their directorial performance is exempt from service tax. The impugned order was set aside and appeals allowed.

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Issues Involved:

1. Whether Director's remuneration in the form of commission as a percentage of the company's total profit is liable to service tax under the reverse charge mechanism.

Issue-wise Detailed Analysis:

1. Director's Remuneration and Service Tax Liability:

The central issue in this case was whether the commission paid to directors, as a part of their remuneration and derived from the company's profits, is subject to service tax under the reverse charge mechanism. The appellant argued that this issue is well-settled through various judgments, asserting that such remuneration is not liable to service tax. The appellant cited numerous cases, including M/s. Jindal Steel & Power Ltd. v. CST and Allied Blenders & Distillers Pvt. Ltd. v. CCE & ST, among others, to support their position that director's remuneration categorized as salary is not a 'service' under Section 65B(44) of the Finance Act, 1994.

The tribunal examined the nature of the payments made to directors, noting that these payments were treated as salary under the Income Tax Act, 1961, with TDS deducted accordingly. The tribunal emphasized that the remuneration paid to directors, including commission from company profits, does not constitute a service under the Finance Act, as it falls within the employer-employee relationship, which is excluded from the definition of 'service.'

2. Precedents and Legal Interpretations:

The tribunal referred to several precedents where similar issues were adjudicated, consistently ruling that director's remuneration paid as a salary, including any commission, is not subject to service tax. Key judgments included Allied Blenders and Distillers Pvt Ltd Vs. C.C.E & S.T. Aurangabad, where it was determined that remuneration paid to directors, who are also employees, does not qualify as a service under the Finance Act. The tribunal reiterated that the relationship between the company and its directors, when they are full-time employees, is that of employer and employee, thus exempting such remuneration from service tax.

3. Clarifications and Circulars:

The tribunal also considered Circular No. 115/9/2009-S.T., which clarified that payments to directors, even if termed as commission, are not within the scope of 'Business Auxiliary Services' and thus not liable to service tax. This circular reinforced the tribunal's view that director's remuneration, including commission from profits, is not a taxable service.

4. Conclusion and Tribunal's Decision:

Based on the analysis of facts, legal precedents, and clarifications, the tribunal concluded that the remuneration paid to directors, including commission as part of the company's profit, is not liable to service tax under the reverse charge mechanism. The tribunal set aside the impugned order and allowed the appeal, affirming that the issue is settled law and the demand for service tax on such remuneration is unsustainable.

The judgment was pronounced in the open court on 22.10.2024, and the appeals were allowed, setting aside the previous orders demanding service tax on director's remuneration.

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