2020 (11) TMI 622 - AT - Service Tax

Taxable Service or not - payment of remuneration in the nature and form of commission based on percentage of profit to whole time directors - reverse charge mechanism (RCM) - demand of service tax on fixed part as well as the variable pay - benefit of N/N. 30/2012-S.T., dated 20th June 2012 - It is the case of the Department that the said remuneration paid to the Directors would constitute service liable to service tax in the hands of appellant assessee under reverse charge mechanism - HELD THAT - Section 2(94) of Companies Act, 2013, 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. The certificate issued by the company secretory states that the remuneration is given in various form as allowed under the Companies act, 2013. 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 assessee and the whole-time Director - thus, 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 assessee company. Since demand of service tax is set aside, penalty and interest are also not sustainable. Appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Whether the demand of service tax on the remuneration paid to whole-time Directors is valid under reverse charge mechanism?
2. Whether the remuneration paid to whole-time Directors constitutes a 'service' liable to service tax under reverse charge mechanism?
3. Whether the whole-time Directors can be considered as employees of the company for the purpose of service tax liability?
4. Whether the demand of service tax, penalty, and interest on the remuneration paid to whole-time Directors is sustainable?

Analysis:
Issue 1: The Appellant challenged the demand of service tax imposed on the remuneration paid to whole-time Directors under the reverse charge mechanism. The Ld. Adjudicating authority confirmed the demand based on the Show Cause Notice dated 31st October 2017, amounting to ?4,68,27,090 for the period from 2012-13 to 2015-16. The Appellant argued that the remuneration paid to the Directors should not be subject to service tax as they are employees of the company.

Issue 2: The Appellant contended that the remuneration paid to the whole-time Directors, including fixed and variable components, should not be considered a 'service' liable to service tax under the reverse charge mechanism. The Appellant provided evidence that the remuneration paid to the Directors was in compliance with the Companies Act, 2013, and subjected to tax deduction at source (TDS) under the Income-tax Act, 1961.

Issue 3: The Tribunal analyzed the nature of the relationship between the whole-time Directors and the company to determine whether the Directors can be considered as employees for the purpose of service tax liability. The Tribunal referred to legal provisions and precedents to establish that the whole-time Directors are essentially employees of the company, and the remuneration paid to them is pursuant to an employer-employee relationship.

Issue 4: The Tribunal, after considering the arguments presented by both sides, held that the demand of service tax on the remuneration paid to whole-time Directors cannot be sustained. The Tribunal relied on legal precedents and statutory provisions to support its decision. Consequently, the Tribunal allowed the appeal filed by the Appellant, setting aside the demand of service tax, penalty, and interest on the remuneration paid to the whole-time Directors.

In conclusion, the Tribunal ruled in favor of the Appellant, determining that the remuneration paid to the whole-time Directors did not constitute a taxable service under the reverse charge mechanism. The Tribunal emphasized the employer-employee relationship between the company and the Directors, leading to the dismissal of the service tax demand, penalty, and interest.