2025 (8) TMI 10 - AT - Service Tax

Remuneration to whole-time directors is salary under Income Tax Act, exempt from service tax under reverse charge rule

M/s. Thriveni Earth Movers Pvt. Ltd. Versus Commissioner of GST and Central Excise, Salem

The CESTAT Chennai held that remuneration paid to whole-time directors of the appellant company constitutes salary subject to TDS under the Income Tax ... Levy of service tax on remuneration paid to the Directors by the appellant - failure to pay appropriate service tax under the reverse charge on the services rendered by the Directors of the company and received by the Appellant during the period from Aug 12 to March 2014 - existence of employee-employer relationship or not - HELD THAT:- The Appellant has all along argued that the whole-time Directors have been paid salary and other remuneration which was subjected to Tax Deducted at Source (TDS) under the Income Tax Act and as such there is an employer-employee relationship which is excluded from the payment of service tax. All the seven Directors of the Company were appointed as whole time Directors of the Company by employment agreements. It appears that these Executive Directors were delegated with the work of managing the day-to-day affairs of the Company and they were not giving any advice to the Company in order to term them as service providers to levy service tax. It is also found that a whole-time director is considered and recognized as ‘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 and the mere fact that the whole-time Director is compensated by way of variable pay will not in any manner alter or dilute the position of employer-employee status between the company /appellant and the whole-time Directors - It is convinced that when the very provisions of the Companies Act make whole-time director (as also in capacity of key managerial personnel) responsible for any default/offences, it leads to the conclusion that those directors are employees of the Appellant company. The activity of appointment of Directors and their services is covered under Negative List of services prescribed under Section 65B (44) (b) of the FA 1994 and so it follows that the impugned Order-in-Original No. 15/2015 (ST-Commr.) dated 23.10.2015 is not tenable. Existence of employee-employer relationship or not - HELD THAT:- The issue of payment of service tax on the remuneration paid to the Directors is no more res-integra where it is termed as salary and subjected to TDS under Section 192 of the Income Tax Act, the employer and employee relationship gets established and the same is excluded from the purview of the service tax. We find that similar issue has been discussed in the case of M/s. Dixcy Textiles Pvt. Ltd. Vs. The Commissioner of Central Excise & Service Tax, Salem [2025 (5) TMI 316 - CESTAT CHENNAI], wherein the Tribunal Chennai has held 'demand of service tax on remuneration paid to whole-time directors cannot be sustained and hence set aside.' In a recent decision of this Tribunal in the case M/s. Vinayaka Electro Alloys Pvt. Ltd. vs Commissioner of GST & Central Excise, Salem, [2025 (6) TMI 13 - CESTAT CHENNAI], it was held that no service tax is payable under RCM on remuneration paid to whole-time directors functioning as employees. This judgment reinforces the principle that remuneration to whole-time directors, when functioning as an employee, does not attract service tax under RCM. Both the demand of service tax and penalties confirmed in the impugned order are set aside - Appeal allowed. ISSUES: Whether remuneration paid to whole-time Directors of a company constitutes a 'service' liable to Service Tax under reverse charge mechanism.Whether the relationship between the company and its whole-time Directors qualifies as an employer-employee relationship excluding such remuneration from Service Tax liability under Section 65B(44)(b) of the Finance Act, 1994.Whether payment of remuneration including salary, allowances, commission on profits, and other variable pay to Directors attracts Service Tax under reverse charge mechanism.Whether the issuance of Form 16 and deduction of TDS under Section 192 of the Income Tax Act establishes the employer-employee relationship for Service Tax purposes.Whether the demand of Service Tax, interest, and penalty on remuneration paid to whole-time Directors is sustainable in law. RULINGS / HOLDINGS: Remuneration paid to whole-time Directors who have entered into employment agreements with the company and are subject to TDS under Section 192 of the Income Tax Act is excluded from the definition of 'service' under Section 65B(44)(b) of the Finance Act, 1994, as it constitutes 'a provision of service by an employee to the employer in the course of or in relation to his employment.'The whole-time Directors, being 'key managerial personnel' under the Companies Act and responsible for compliance under the same Act, are employees of the company, and their remuneration is not liable to Service Tax under the reverse charge mechanism.The presence of variable pay components such as commission on profits or performance-related bonuses does not alter the employer-employee relationship or attract Service Tax liability.The issuance of Form 16 certifying TDS under Section 192 of the Income Tax Act on the remuneration paid to Directors reinforces the employer-employee relationship and supports exclusion from Service Tax liability.The demand of Service Tax, interest, and penalty confirmed by the adjudicating authority on remuneration paid to whole-time Directors is not tenable and is set aside. RATIONALE: The Court applied the statutory framework under the Finance Act, 1994, particularly Section 65B(44)(b), which excludes services provided by an employee to the employer from the definition of taxable service.The Court relied on employment agreements explicitly stating the employer-employee relationship, the Companies Act provisions recognizing whole-time Directors as key managerial personnel and officers in default, and the fact that TDS was deducted under Section 192 of the Income Tax Act with issuance of Form 16.The Court referred to binding Board Circular No. 115/09/2009-ST clarifying that remuneration paid to Managing Directors/Directors who are whole-time employees is not liable to Service Tax.The Court considered precedent decisions from various Tribunals holding that remuneration paid to whole-time Directors as employees, including commission and profit-based pay, is excluded from Service Tax under reverse charge mechanism.The Court rejected the argument that variable pay or commission converts the relationship into a taxable service, emphasizing the primacy of the employer-employee relationship as established by statutory provisions and tax treatment under the Income Tax Act.No dissenting or differing opinion was recorded; the judgment affirms established legal principles without doctrinal shift.