Employer employee exception: director remuneration treated as salary is excluded from 'service' and not subject to reverse charge service tax.

Commission paid by a company to its managing, whole time or independent directors as remuneration forming part of salary falls within the employer employee exception to the definition of 'service' and therefore is not leviable to service tax under the reverse charge mechanism; this conclusion relies on the exclusion in the statutory definition of service, the established treatment of such amounts as salary subject to TDS and income tax return disclosure, and prior administrative guidance excluding director remuneration from business auxiliary or management consultant services, resulting in allowance of the assessee's appeal.

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Issues: (i) Whether commission paid to directors out of company profits, treated as part of directors' remuneration and taxed as salary, is liable to service tax under reverse charge for the period 2015-16 to June 2017.

Analysis: The issue was examined in light of Section 65B(44) of the Finance Act, 1994 (definition of 'service' and the exclusion for a provision of service by an employee to the employer), Section 73(2) of the Finance Act, 1994 (demand confirmation), Notifications No. 45/2012-S.T. and 46/2012-S.T., and CBIC Circular No. 115/9/2009-S.T., dated 31.07.2009, which clarifies that amounts paid to managing directors/directors as commission or remuneration for performance as directors are not within 'business auxiliary service' or 'management consultant service'. The Tribunal also relied on its earlier decision in the appellant's favour on the identical issue and on consistent authority holding that remuneration paid to whole-time directors, subject to TDS as salary and shown in income-tax returns, falls within the employer-employee exception and is not chargeable to service tax under reverse charge.

Conclusion: The commission paid to directors as part of their remuneration is not liable to service tax under the reverse charge mechanism; appeal allowed in favour of the assessee.

Ratio Decidendi: Payments made by a company to its managing directors/whole-time or independent directors as remuneration or commission forming part of salary are not 'service' within Section 65B(44) of the Finance Act, 1994 and are therefore not leviable to service tax under the reverse charge mechanism, consistent with CBIC Circular No. 115/9/2009-S.T.

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