Company wins appeal on director commission payments not subject to service tax under reverse charge mechanism

CESTAT Ahmedabad ruled in favor of the appellant company regarding service tax liability on commission payments to Managing Director and Executive Director under reverse charge mechanism. The tribunal held that commission paid to directors does not constitute Business Auxiliary Service and is therefore not liable to service tax. The decision was based on a previous ruling in the appellant's own case where it was established that director commissions fall outside the scope of taxable services. The impugned order was set aside and appeal allowed.

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Issues Involved:

1. Whether the commission paid to the Managing Director and Executive Director in addition to their salary is liable to service tax under the reverse charge mechanism as per the relevant notifications.

Issue-wise Detailed Analysis:

1. Liability of Service Tax on Commission Paid to Directors:

The primary issue in this case is whether the commission paid by the appellant company to its Managing Director and Executive Director, in addition to their salary, is subject to service tax under the reverse charge mechanism as per Notification No. 30/2012-ST, amended by Notification No. 45/2012. The appellant argued that this issue is not res-integra, citing several judgments, including a previous decision in the appellant's own case.

The tribunal examined whether the service provided by the directors as employees to the employer falls under the definition of "service" as per Section 65B(44) of the Finance Act, 1994. The tribunal noted that the provision of service by an employee to the employer in the course of or in relation to employment does not constitute a "service" under the Act. The directors were considered employees of the company, and the commission paid was part of their employment remuneration. This was supported by the fact that the payment was recorded as salary in the company's books and accepted by the Income Tax Department, with TDS deducted under the salary head.

The tribunal also referred to CBEC Circular No. 115/9/2009-ST, which clarified that payments made to directors, even if termed as commission, do not fall within the scope of business auxiliary service and are not subject to service tax. The circular further clarified that directors performing management functions, rather than consultancy or advisory functions, are not providing a taxable service.

Several judgments were cited to support the appellant's position, including cases where tribunals held that remuneration paid to whole-time directors, even if in the form of commission, is pursuant to an employer-employee relationship and not subject to service tax. The tribunal consistently found that whole-time directors are employees of the company, and payments to them are in the nature of salaries, not taxable services.

In conclusion, the tribunal determined that the commission paid to the directors does not fall under the definition of service as per the Finance Act, 1994, and is not liable to service tax. The impugned order was set aside, and the appeal was allowed, reinforcing the position that such commission payments are not taxable under the service tax regime.

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