2019 (1) TMI 433 - AT - Service Tax

Levy of Service Tax - remuneration paid to the Directors - reverse charge mechanism - N/N. 45/2012-ST dated 7.8.2012 and 46/2012-ST dated 7.8.2012 - service or not - employer-employee relationship - Held that - The Appellant have placed on record the Form-16 issued by the appellant indicating deduction of income tax at source on the salary paid to each of the Directors. Besides, the appellant had also produced the contribution made to the Employees Provident Fund for each of the Directors, as required in case of other employees under the relevant Laws - Similarly, the Form-32 as required to be filed under the Companies Act, with the Registrar of companies, the four directors are shown as executive directors indicating that they are employees of the company. It is the agreement between the employer i.e. company and the Director would reveal the exact relationship between them - In the present case, no such agreement exists between the employer and the Directors, hence there exists no employer-employee relationship. All the necessary deductions on account of Provident Fund, Professional Tax and TDS under Section 192 of the Income Tax Act are made as applicable; also they were issuing Form-16 like it is issued to all other employees. Even in the salary return filed by the appellant company before the Income Tax authorities, the director s names have been included. The company does not pay the director s sitting fee to any of the directors. To discredit the said statement, no contrary evidence was produced by the Revenue to establish that the directors are not involved in the day to day function of the Company, but participate only in Board Meetings and consequently paid remuneration. Also, from the documents produced by the Appellant it is crystal clear that the Directors who are concerned with the management of the company, were declared to all statutory authorities as employees of the company and complied with the provisions of the respective Acts, Rules and Regulations indicating the Director as an employee of the company - No contrary evidence has been brought on record by the Revenue to show that the Directors, who were employee of the appellant received amount which cannot be said as salary but fees paid for being Director of the company - The Income Tax authorities also assessed the remuneration paid to the said directors as salary, a fact cannot be ignored. Appeal allowed - decided in favor of appellant.

Issues Involved:

1. Whether remuneration paid to directors qualifies as salary or service.
2. Applicability of reverse charge mechanism for service tax on director's remuneration.
3. Employer-employee relationship between the company and its directors.
4. Validity of extended period of limitation for issuing the demand notice.

Detailed Analysis:

1. Whether remuneration paid to directors qualifies as salary or service:

The appellant argued that the remuneration paid to the directors should be considered as salary, not as a service. The directors were whole-time directors and employees of the company. They referred to various provisions of the Companies Act, particularly Section 2(94) which defines a whole-time director as an officer of the company, implying an employee status. The remuneration included salary, benefits, bonuses, and other elements typical of an employer-employee relationship. The appellant also highlighted that the directors performed day-to-day managerial functions under the supervision of the Board of Directors.

The Revenue countered that terms like 'employer', 'employee', and 'salary' are not defined under the Finance Act, 1994, Income Tax Act, 1961, or the Companies Act, 1956. They argued that the relationship should be determined by the Articles of Association or a separate agreement, which were not provided by the appellant. The Revenue also cited various judicial precedents to argue that the directors did not have an employer-employee relationship with the company.

2. Applicability of reverse charge mechanism for service tax on director's remuneration:

The Revenue issued a demand notice for service tax under the reverse charge mechanism, based on Notifications No. 30/2012-ST and 45/2012-ST, arguing that the remuneration paid to the directors amounted to a service. The appellant contested this, stating that since the directors were employees, the remuneration paid to them was not a 'service' as per Section 65B(44) of the Finance Act, 1994, which excludes services provided by an employee to an employer.

3. Employer-employee relationship between the company and its directors:

The appellant provided evidence such as Form-16, TDS certificates, and EPF contributions to demonstrate that the directors were treated as employees. They argued that the directors were appointed by resolutions of the Board of Directors and could be removed by the company, indicating an employer-employee relationship. The appellant also cited the Supreme Court's judgment in Ram Pershad Vs. CIT, which laid down the criteria for distinguishing between a servant and an agent, emphasizing control and supervision by the employer.

The Revenue argued that mere deduction of TDS and EPF contributions does not establish an employer-employee relationship. They contended that the relationship should be determined by specific agreements or the Articles of Association, which were not provided. They also cited various judicial precedents to support their argument.

4. Validity of extended period of limitation for issuing the demand notice:

The appellant argued that the extended period of limitation was not applicable as there was no suppression of facts. They contended that the remuneration paid to the directors was disclosed in their returns filed with the Registrar of Companies and reflected in the balance sheets. The issue of whether service tax was applicable on the remuneration was a question of law and subject to interpretation, not suppression.

Judgment:

The Tribunal found merit in the appellant's arguments. It noted that the directors were appointed as whole-time directors, involved in day-to-day management, and treated as employees in statutory filings. The Tribunal referred to the Supreme Court's judgment in Ram Pershad Vs. CIT, which supported the appellant's position that the directors were employees. The Tribunal also found that the Revenue did not provide contrary evidence to disprove the employer-employee relationship.

The Tribunal concluded that the remuneration paid to the directors was in the nature of salary, not a service, and thus not subject to service tax under the reverse charge mechanism. The Tribunal also found that the extended period of limitation was not applicable as there was no suppression of facts.

Conclusion:

The impugned order was set aside, and the appeal was allowed. The Tribunal held that the remuneration paid to the directors was salary and not subject to service tax under the reverse charge mechanism.

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