2025 (7) TMI 1410 - AT - Service Tax

Payments to full-time directors are salary, not taxable under Management Consultancy Service per Section 65(105)(zzzz)

The CESTAT Chennai held that payments made to a full-time director are considered salary and not subject to service tax under Management Consultancy ... Nature of transaction - service or salary given - consideration paid to Shri Vijay Raina is towards salary or towards Management Consultancy Service? - HELD THAT:- It is not in dispute that if the payment is towards salary, no service tax is liable to be paid on the same. There is a catena of judgments that support the position that any consideration paid to full time Director is not leviable to Service Tax. In Maithan Alloys Ltd. Versus Commissioner of Central Excise & Service Tax, Bolpur, [2019 (4) TMI 1595 - CESTAT KOLKATA], the Tribunal held that demand of service tax on remuneration paid to whole-time directors cannot be sustained. In Rent Works India Pvt. Ltd. Versus Commissioner of Central Excise, Mumbai-V [2016 (5) TMI 786 - CESTAT MUMBAI] which was relied in Maithan Alloys Ltd. Versus Commissioner of Central Excise & Service Tax, Bolpur (supra), the Tribunal has held that if a payment made to a person is considered as a salary by the Income Tax Department, a branch of Ministry of Finance, Department of Revenue, it cannot be held by the Service Tax Department, another branch of Ministry of Finance, Department of Revenue, as amount paid for consultancy charges and taxable under Finance Act. In PCM Cement Concrete Pvt. Ltd. Versus Commissioner of Central Excise & Service Tax, Siliguri [2017 (9) TMI 1382 - CESTAT KOLKATA], which was also relied in Maithan Alloys Ltd. Versus Commissioner of Central Excise & Service Tax, Bolpur, the Tribunal has held that that consideration paid to whole-time directors would be treated as payment of salaries inasmuch as there would be employer-employee relationship and in such case the levy of service tax cannot be sustained. In the instant case, the Appellant has not produced any documentary evidence either before the Original Adjudicating Authority or the Lower Appellate Authority to prove that the amount paid was pertaining to salary of Shri Vijay Raina. It has to be observed that the matter would have been simpler if salary bill or Form-16 issued to the Director, or Income Tax returns filed had been submitted, which is not the case - However, a perusal of appeal records indicates that the demand of service tax was made under Management Consultancy Service for the period from May 2008 to March 2009 and the Show Cause Notice was issued invoking extended period on 15.04.2011. Further, the Appellant has paid the entire tax amount along with interest amounting to Rs.5,82,874/- on 13.05.2011 which is within 30 days from the date of issuance of the Show Cause Notice. There are no reason not to believe the Ld. Advocate’s assertion that what was paid was only a part of the salary of Shri Vijay Raina who was Director of the Appellant Company during the impugned period - appeal allowed. ISSUES: Whether the consideration paid to a whole-time director constitutes salary or is liable to service tax as Management Consultancy Service.Whether payments made to directors, including those termed as commissions, fall within the scope of Business Auxiliary Services for service tax purposes.Whether extended period of limitation and penalty under Section 78 are sustainable in absence of allegation of suppression or fraud.Whether imposition of equal penalty is justified when service tax demand along with interest is paid within 30 days of Show Cause Notice. RULINGS / HOLDINGS: The consideration paid to a whole-time director is 'remuneration' pursuant to an employer-employee relationship and not liable to service tax under Management Consultancy Services; 'demand of service tax on remuneration paid to whole-time directors cannot be sustained.'Payments made by companies to Managing Directors/Directors (whole-time or independent) are not chargeable under 'Management Consultancy service' as these directors 'perform management function and they do not perform consultancy or advisory function.'Amounts paid to directors, even if termed as commissions, are not within the scope of Business Auxiliary Service and hence not liable to service tax under that category.Extended period of limitation and penalty under Section 78 are not sustainable in absence of any 'allegation of suppression and fraud' in the Show Cause Notice.Imposition of equal penalty is not correct where the appellant has paid service tax demand with interest within 30 days from the date of Show Cause Notice.Where the Income Tax Department treats payments to directors as salary and deducts tax under Section 192, the Service Tax Department cannot treat the same payments as taxable consultancy fees; 'the same department of Government of India cannot take different stand on the amount paid to the very same person and treat it differently.' RATIONALE: The Court applied the legal framework established by the Central Excise Tariff Act, the Finance Act relating to service tax, and relevant provisions of the Companies Act defining whole-time directors as employees and key managerial personnel.Board's Circular No.115/09/2009-ST clarified that payments to directors for management functions are not consultancy services and thus not taxable under Management Consultancy Service.Precedents from Tribunal decisions (Maithan Alloys Ltd., Rent Works India Pvt. Ltd., PCM Cement Concrete Pvt. Ltd.) were followed, establishing that remuneration to whole-time directors is akin to salary and not subject to service tax.The principle of consistency within branches of the Ministry of Finance was emphasized, preventing contradictory treatment of the same payment by Income Tax and Service Tax authorities.The absence of documentary evidence such as salary bills, Form-16, or Income Tax returns initially complicated the matter; however, subsequent production of evidence and the director's status confirmed the employer-employee relationship.The Court rejected the invocation of extended period and penalty provisions due to lack of allegations of suppression or fraud, consistent with statutory requirements under Section 78.