2025 (3) TMI 965 - AT - Service Tax

Levy of service tax under RCM on the remuneration (salary commission and perquisites) paid to the promoter (whole-time director/ whole time directors) - non-payment of service tax considering the services rendered by them to appellant to be in relation to employment - HELD THAT - The department is not disputing that the Income Tax has been paid on such remuneration/commission under Income Tax Act as salary on the grounds that both the Acts are different and any treatment of an amount under Income Tax Act or Provident Fund has no bearing on leviability of service tax under the Finance Act 1994. In an identical situation the issue as to whether the service tax can be levied on Vice Chairman/Chairman cum Managing Director who also happened to be shareholder/promoter this Bench has dealt with the issue in the case of Amara Raja Batteries 2024 (6) TMI 1331 - CESTAT HYDERABAD . The Adjudicating Authority has mainly contested that there is no employer and employee relationship between the company and whole time director/promoter. Apparently the Adjudicating Authority has felt that in the absence of any contract or agreement between the Managing Director and the Company to hire or fire the consideration paid cannot be treated as salary and that it is a settled legal position that the payment of Income Tax and Provident Fund does not absolve the charge of service tax. The issue of leviability of service tax on Chairman/ Vice Chairman cum Managing Director/ whole time executive directors receiving salary and perks has been extensively dealt with by this Bench in the case of Amara Raja Batteries. In addition various other case laws relied upon by the appellant are also relevant to come to the conclusion that the Managing Director/whole time director even if they are promoter are nothing but employees of the Company as they are engaged in key managerial functions and running day to day affairs of the company as against the independent directors or non-executive directors who are engaged in providing advisory services. The appellants have clearly discharged their service tax liability in respect of independent directors/ non-executive directors. It is also not in dispute that the Income Tax has been paid by treating this amount as salary income and even Provident Fund has been deducted accordingly. Conclusion - Remuneration paid to whole-time directors when treated as salary and subject to income tax and Provident Fund deductions is not liable to service tax. Appeal allowed.

ISSUES PRESENTED and CONSIDERED

The core legal issue in this judgment is whether service tax is leviable on the remuneration paid to the Executive Chairman and Managing Director of the appellant company under the reverse charge mechanism (RCM) for the period from April 2013 to June 2017. This involves determining if the remuneration paid to whole-time directors, considered as employees, falls outside the scope of service tax under the Finance Act, 1994.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The relevant legal provisions include Section 65B(44) and Section 68(2) of the Finance Act, along with Notification No.30/2012-ST, which outline the applicability of service tax under the reverse charge mechanism. The appellant argued that the remuneration paid to whole-time directors is in the nature of salary and thus not subject to service tax. The appellant relied on various precedents, including Amara Raja Batteries Ltd Vs CCT, Tirupati, which held that directors, when acting in a managerial capacity, are employees and not subject to service tax for their remuneration.

Court's Interpretation and Reasoning

The Tribunal considered the Articles of Association (AoA) of the appellant company, which defined the roles and responsibilities of the Managing Director and whole-time directors, indicating their status as employees. Articles 50, 57, and 60 of the AoA were particularly highlighted, establishing that these directors are involved in the day-to-day management and are subject to the control of the Board, akin to an employer-employee relationship.

The Tribunal also examined the distinction between independent/non-executive directors and whole-time directors, emphasizing that the latter are engaged in managerial functions, unlike the former who provide advisory services. The Tribunal acknowledged that the appellant had already discharged service tax on payments to independent directors.

Key Evidence and Findings

The Tribunal noted that the remuneration paid to the whole-time directors was treated as salary for income tax purposes, with deductions for Provident Fund, reinforcing the employee status of these directors. The Tribunal found that the appellant had adhered to the applicable legal framework by treating the remuneration as salary, which is not subject to service tax.

Application of Law to Facts

Applying the legal principles and precedents, the Tribunal concluded that the remuneration paid to the whole-time directors, including the Executive Chairman and Managing Director, constituted salary and was not liable to service tax under the Finance Act, 1994. The Tribunal found that the Adjudicating Authority's interpretation, which failed to recognize the employer-employee relationship, was incorrect.

Treatment of Competing Arguments

The Tribunal addressed the department's argument that the absence of a formal contract negated the employer-employee relationship. It rejected this view, citing the AoA and the managerial roles of the directors as sufficient evidence of such a relationship. The Tribunal also dismissed the department's reliance on the distinction between tax treatments under different laws, reaffirming that the nature of the payment as salary was determinative for service tax purposes.

Conclusions

The Tribunal concluded that the demand for service tax on the remuneration paid to the whole-time directors under RCM was unsustainable. The Tribunal set aside the impugned order, allowing the appeal and confirming that the remuneration was not subject to service tax.

SIGNIFICANT HOLDINGS

The Tribunal established the principle that remuneration paid to whole-time directors, when treated as salary and subject to income tax and Provident Fund deductions, is not liable to service tax. The Tribunal emphasized the employer-employee relationship inherent in the directors' managerial roles, as defined by the company's Articles of Association.

The Tribunal's final determination was to set aside the demand for service tax, thereby allowing the appeal. This decision reinforces the legal distinction between managerial remuneration and service fees for tax purposes, particularly under the reverse charge mechanism.

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