2019 (4) TMI 1595 - AT - Service Tax

Reverse charge mechanism (RCM) - Remuneration paid to Directors - the assessee company pays remuneration to its whole time directors which has fixed as well as variable components - 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 assessee under reverse charge mechanism - HELD THAT - 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 - when the very provisions of the Companies Act makes 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. In the present case, the appellant has duly deducted tax under section 192 of the Income Tax which is the applicable provisions for TDS on payments to employees. This factual and legal position also fortifies the submission made by the appellant that the whole time directors who are entitled to variable pay in the form of commission are employees and payments actually made to them are in the nature of salaries. This factual position cannot be faulted in absence of any evidence to the contrary. Demand of service tax on remuneration paid to whole time directors cannot be sustained - appeal allowed - decided in favor of appellant.

Summary

Issues:
Demand of service tax on remuneration paid to whole time directors under reverse charge mechanism.

Analysis:
The appellant, a manufacturer of Ferro Alloys, paid remuneration to its whole time directors, which included fixed and variable components. The Department raised a demand of service tax on this remuneration under reverse charge mechanism. The appellant contended that the remuneration to whole time directors, who are salaried employees, was subject to TDS under the Income Tax Act, and therefore, not liable to service tax. The appellant cited legal provisions, judicial decisions, and circulars to support their argument that payments to whole time directors should be treated as salaries and not subject to service tax.

The Tribunal analyzed the definition of 'whole time director' under the Companies Act, recognizing them as employees entitled to remuneration. The Tribunal emphasized the employer-employee relationship between the company and whole time directors, stating that the variable pay structure does not alter this relationship. The Tribunal noted that the appellant had deducted tax under the Income Tax Act applicable to payments to employees, further supporting the argument that the remuneration to whole time directors should be considered as salaries.

The Tribunal referred to legal precedents and statutory provisions to conclude that the demand of service tax on remuneration paid to whole time directors cannot be sustained. Citing previous judgments, the Tribunal held that payments to whole time directors should be treated as salaries due to the employer-employee relationship, and therefore, not subject to service tax. Consequently, the demand for service tax, penalty, and interest were set aside, and the appeal filed by the appellant was allowed with consequential relief as per law.