2025 (5) TMI 316 - AT - Service Tax

Directors' remuneration to whole-time directors exempt from service tax under Section 65B(44)(b) as employer-employee relationship established

M/s. Dixcy Textiles Pvt Ltd Versus The Commissioner of C. Ex, & ST Salem Commissionerate

CESTAT Chennai allowed the appeal regarding service tax levy on remuneration paid to directors. The appellant company claimed directors' remuneration ... Levy of service tax on the remuneration paid to the directors of the appellant company - such remuneration is claimed to be salary paid to whole-time directors in an employer-employee relationship - negative listed service in terms of section 66D of the Act or exempted service under Mega Exemption N/N. 25/2012-ST dated 20-06-2012 - HELD THAT:- The adjudicating authority has chosen to ignore the appellant’s contention that there is an employer employee relation on the grounds that no appointment order has been produced. It is also seen that the adjudicating authority has noted the definition of salary as defined under Section 17(1) of the Income Tax Act, 1961 yet has chosen to hold that the directors are not employees as in his view, the term salary does not include remuneration, sitting fee etc., paid to the directors and thereby the exclusive clause of Section 65B(44) is inapplicable. Strangely, he has chosen to do so, without controverting the evidence adduced by the appellant along with its reply, by way of resolutions passed by the Board of Directors in accordance with the Companies Act which stated inter-alia that the directors concerned in the notice have been appointed as whole time directors and will be entitled to a salary as may be fixed from time to time. He has also ignored the Form 16 issued as a Certificate under Section 203 of the Income Tax Act, 1961 for tax deducted at source on salary in respect of these directors that was adduced in evidence. This Tribunal in Maithan Alloys Ltd v. Commissioner of C.Ex & ST, Bolpur [2019 (4) TMI 1595 - CESTAT KOLKATA] has held that 'demand of service tax on remuneration paid to whole-time directors cannot be sustained and hence set aside.' The appellant has enclosed the very same evidence of Board Resolutions as well as Form 16 of the concerned Directors, along with the appeal records, which given the earlier decisions of this Tribunal, evidence the employer employee relationship between the appellant and the directors involved in this notice. There is no contrary evidence let in that the Directors mentioned in the notice are rendering any other services to the appellant - the adjudicating authority has grossly erred in his finding that these directors were not employees of the appellant and in confirming the demand made along with applicable interest on the appellant and imposing penalty on the appellant. Conclusion - Services rendered by such directors fall within the employer-employee relationship and are excluded from service tax under Section 65B(44)(b) of the Finance Act. Appeal allowed. The core legal question considered by the Tribunal is whether the demand of service tax on the remuneration paid to the directors of the appellant company is tenable under the Finance Act, 1994, particularly when such remuneration is claimed to be salary paid to whole-time directors in an employer-employee relationship.The Tribunal examined the applicability of service tax on payments made to directors under the reverse charge mechanism, focusing on whether the services rendered by the directors fall within the taxable ambit or are excluded as 'employees' services' under the statutory framework.In addressing this issue, the Tribunal considered the following legal provisions and precedents:1. Section 65B(44)(b) of the Finance Act, 1994, which excludes 'employees' services to employer' from the definition of 'service' and thus from service tax levy.2. Rule 2(1)(d) of the Service Tax Rules, 1994, which defines taxable value and its interaction with the Finance Act.3. The Companies Act provisions (Sections 2(24), 2(54), 166, 179, 2(94), 2(51), and 2(60)) defining 'director,' 'whole-time director,' 'key managerial personnel,' and 'officer in default,' establishing the legal status and duties of directors within a company.4. Income Tax Act provisions, particularly Section 192 and Section 203, relating to tax deduction at source (TDS) on salaries and issuance of Form 16 as salary certificates.5. Precedential decisions by the Tribunal, including Maithan Alloys Ltd v. Commissioner of C.Ex & ST, Bolpur, Amar Raja Batteries v. Commissioner of Central Tax, Tirupathi-GST, and Rent Works India Pvt Ltd v. CCE, Mumbai-V, which have addressed the nature of payments to whole-time directors and the applicability of service tax.The Tribunal's interpretation and reasoning focused on whether the directors in question were whole-time employees of the appellant company and whether their remuneration constituted salary, thereby falling outside the scope of taxable 'service' under the Finance Act.The Tribunal noted that the adjudicating authority had erred by disregarding the employer-employee relationship on the ground that no appointment order was produced and by misinterpreting the definition of salary under the Income Tax Act. The adjudicating authority had held that remuneration, sitting fees, and travel expenses paid to directors were not salary and thus not excluded from service tax. This conclusion was reached without adequately considering the evidence submitted by the appellant, including:- Board Resolutions passed under the Companies Act appointing the directors as whole-time directors with entitlement to salary.- Form 16 issued under Section 203 of the Income Tax Act evidencing TDS on salary paid to these directors.- Communication with the Employees Provident Fund Organization recognizing the directors as regular employees.- Relevant CBIC and Ministry of Corporate Affairs circulars clarifying the status of whole-time directors and the non-applicability of service tax on their remuneration.Applying the law to the facts, the Tribunal relied heavily on the precedent set in Maithan Alloys Ltd, where it was held that whole-time directors are employees of the company, and remuneration paid to them is in the nature of salary. The Tribunal emphasized that the Companies Act treats whole-time directors as key managerial personnel and officers in default, underscoring their employee status. The fact that remuneration includes variable pay or commission does not alter this status.The Tribunal also referred to the Rent Works India decision, which held that payments treated as salary for Income Tax purposes, including TDS deductions, cannot be treated as consideration for taxable services attracting service tax.In treating competing arguments, the Tribunal rejected the Department's contention that the absence of a formal appointment order negated the employer-employee relationship. The Tribunal found that the Board Resolutions and statutory compliance under the Companies Act sufficed to establish the directors' status as employees. The Department's reliance on Rule 2(1)(d) of the Service Tax Rules was held to be subordinate to the express exclusion in the Finance Act, which prevails over rules.Consequently, the Tribunal concluded that the demand for service tax on remuneration paid to whole-time directors was unsustainable. Since the demand was set aside, the imposition of interest and penalty under Sections 73(2) and 76 of the Finance Act also could not be sustained.The significant holdings of the Tribunal include the following verbatim excerpt from the Maithan Alloys Ltd decision, which the Tribunal adopted:'The provisions of Companies Act, 2013, contained in Section 2(94), duly defines 'whole-time director' to include a director in the whole-time employment of the company. A whole-time director refers to a director who has been in employment of the company on a full-time basis and is also entitled to receive remuneration. We further find that the position of a whole-time director is a position of significance under the Companies Act. Moreover, a whole-time director is considered and recognized as a 'key managerial personnel' under Section 2(51) of the Companies Act. Further, he is an officer in default [as defined in clause (60) of Section 2] for any violation or non-compliance of the provisions of Companies Act. Thus, in our view, the whole-time director is essentially an employee of the Company and accordingly, whatever remuneration is being paid in conformity with the provisions of the Companies Act, is pursuant to employer-employee relationship...'Core principles established are:Remuneration paid to whole-time directors appointed under the Companies Act and evidenced by Board Resolutions and statutory compliance is treated as salary paid to employees.Services rendered by such directors fall within the employer-employee relationship and are excluded from service tax under Section 65B(44)(b) of the Finance Act.Rule provisions cannot override the express exclusions in the Finance Act.Tax deduction at source under Income Tax provisions and issuance of Form 16 reinforce the characterization of payments as salary.Demand of service tax, interest, and penalty on such remuneration is not sustainable.Final determinations on the issue are:The demand of service tax on remuneration paid to whole-time directors is set aside.The penalty and interest imposed under the Finance Act are also quashed.The impugned Order-in-Original confirming the demand and penalties is wholly unsustainable and is accordingly set aside.