Director's monthly salary with TDS deduction under Section 192 exempt from service tax on reverse charge basis

CESTAT Ahmedabad held that monthly remuneration paid to a Director, treated as salary with TDS deducted under Section 192 of Income Tax Act and reflected in Form-16, does not attract service tax on reverse charge basis. The tribunal determined that employer-employee relationship exists between the company and Director, making the payment fall under negative list per Section 65B(44)(b) of Finance Act, 1994. Since salary payments to employees are excluded from service tax liability, no service element exists in such transactions. Appeal was allowed in favor of the appellant.

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Issues Involved:

1. Whether the appellant is liable to pay service tax on reverse charge basis for the remuneration paid to its Director.
2. Whether the demand for service tax is sustainable under the extended period of limitation.

Issue-wise Detailed Analysis:

1. Liability to Pay Service Tax on Director's Remuneration:

The primary issue revolves around whether the remuneration paid to the Director qualifies as a salary or a service liable for service tax under the reverse charge mechanism. The appellant argued that the remuneration paid to the Director is a salary for the performance of his duties in the day-to-day operations of the company. This remuneration is recorded as 'Salary' in the company's accounts, and tax is deducted at source under the 'Salary' head in Form-16, as per the Income Tax Act. The appellant contends that the remuneration falls under the negative list of services as per Section 65 B (44) (b) of the Finance Act, 1994, which excludes services provided by an employee to an employer in the course of employment from the definition of 'service'.

The Tribunal found that the Director's remuneration, being categorized as salary, is not liable for service tax under the negative list post 01.07.2012. The lower authorities had confirmed the demand based on the argument that the Director, not taking instructions from seniors, could not be treated as an employee. However, the Tribunal dismissed this contention as baseless, emphasizing that the Director is indeed an employee, as evidenced by statutory records like Form-16. The Tribunal cited several judgments that supported the view that remuneration paid to whole-time directors, treated as employees, is not subject to service tax.

The Tribunal referenced the Allied Blenders and Distillers Pvt Ltd case, where it was determined that remuneration to directors, considered as salary, does not constitute a 'service' under the Finance Act, 1994. The Tribunal also highlighted the Maithan Alloy Ltd case, where it was held that whole-time directors, being employees, receive remuneration as salary, not liable to service tax.

2. Sustainability of Demand under Extended Period of Limitation:

The appellant argued that the demand notice was issued by invoking the extended period of limitation, which was not sustainable due to the absence of suppression of facts. The appellant had been informing the department about the Director's remuneration payments, negating any suppression of facts. The Tribunal agreed with the appellant, noting that there was no evidence of suppression or misrepresentation by the appellant. The demand for the extended period was therefore not sustainable.

In conclusion, the Tribunal set aside the impugned order, allowing the appeal and determining that the remuneration paid to the Director as salary is not liable to service tax. The Tribunal's decision was pronounced in the open court on 25.11.2024.

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