2025 (2) TMI 803 - AT - Service Tax

CESTAT sets aside rejection of VCES declaration for part-time directors' service tax liability due to inadequate examination

Garware Polyester Ltd Versus Commissioner of Central Excise, Customs & Service Tax, Aurangabad

CESTAT Mumbai set aside the rejection of a declaration under Voluntary Compliance Encouragement Scheme (VCES), 2013 regarding alleged service tax ... Rejection of declaration under Voluntary Compliance Encouragement Scheme (VCES), 2013 - alleged tax liability on remuneration paid to part-time directors of the company - rule 2(1)(d)(i)(EE) of Service Tax Rules, 1994 - HELD THAT:- It is evident that the adjudicating authority has neither perused the terms of employment of the said directors nor examined the scope for appointment of whole-time employees as directors in the statutory framework governing companies. It is also not the case of the adjudicating authority that the whole-time directors were being remunerated with sitting fees in addition to contractual compensation. The additional tax liability has been fastened after the ‘negative list regime’ was made operational and influenced, unduly so, by the definition of ‘person liable for paying the service tax’ in Service Tax Rules, 1994 which is nothing but a machinery provision stemming from statutory delegation under section 68 of Finance Act, 1994. Such machinery provision is of significance to the tax scheme only upon determination of tax liability. The tax liability in the present instance could not have been determined unless with, and except by, reference to the contract of employment. In the absence of such enquiry, and further finding thereof in the impugned order, the determination that the claim under the Voluntary Compliance Encouragement Scheme (VCES), 2013 is false, and, thereby, warranting discard is not tenable. Such casual and peremptory discard of relevant aspects of compensation detracts from the validity of the findings. It falls to the adjudicating authority to consider this aspect and upon determination that the said amount should have been included in the taxable service with section 2(1)(d)(ii)(EE) of Service Tax Rules, 1994 to be invoked for fastening tax liability attendant upon discard of claim for privilege under the scheme to enable which the proceedings will have to be restored to the original authority. Conclusion - There is a need for a thorough examination of the terms of employment and contractual arrangements to establish the tax liability accurately. The impugned order is set aside and the matter remanded to back to the original authority. The case involves M/s Garware Polyester Ltd challenging a tax liability decision under the Voluntary Compliance Encouragement Scheme (VCES), 2013. The core legal issue revolves around the tax liability on remuneration paid to part-time directors of the company, specifically focusing on the interpretation of Service Tax Rules, 1994. The main contention is whether the remuneration of managing directors and whole-time directors should be subject to service tax under the relevant provisions.The Court considered the appellant's submission that the rejection of their VCES declaration was erroneous and that the tax liability imposed on them was based on activities that should have been excluded from taxation. The key issue was the alleged tax liability on remuneration paid to part-time directors, which was the subject of dispute between the appellant and the tax authority.The Court analyzed the relevant legal framework, including Rule 2(1)(d)(i)(EE) of Service Tax Rules, 1994, and Notification No. 30/2012-S.T., to determine the tax liability on director's remuneration. The Court interpreted the rules and notifications to establish that the services provided by directors to the company are taxable under the Service Tax Law, and the liability falls upon the service recipient. The Court rejected the appellant's argument that managing directors and whole-time directors should be treated as employees exempt from service tax, emphasizing that the directors' services are not part of the negative list of taxable services.The Court found that the adjudicating authority had not considered the terms of employment of the directors or examined the statutory framework governing companies regarding the appointment of whole-time directors. The Court highlighted the importance of determining tax liability based on the contract of employment and criticized the casual dismissal of relevant aspects of compensation in the impugned order. As a result, the Court set aside the impugned order and remanded the matter back to the original authority for further consideration.In conclusion, the Court's decision focused on the proper interpretation of Service Tax Rules, 1994, in determining the tax liability on remuneration paid to part-time directors. The Court emphasized the need for a thorough examination of the terms of employment and contractual arrangements to establish the tax liability accurately. The decision highlights the importance of considering all relevant factors before imposing tax liabilities and underscores the need for a comprehensive analysis in tax matters to ensure fairness and accuracy in assessments.