CESTAT Chennai Bench clarifies employer-employee relationship, excludes directors' salaries from service tax liability under Reverse Charge Mechanism.
In a significant ruling, the Customs Excise and Service Tax Appellate Tribunal (CESTAT), Chennai Bench, has provided clarity on the applicability of service tax on remuneration paid to directors by M/s Agni Steels Pvt. Limited. The Tribunal adjudicated that the payments categorized as salaries to whole-time directors are not subject to service tax under the Reverse Charge Mechanism (RCM), thereby setting aside the demand made by the Commissioner of GST and Central Excise, Salem.
The case revolved around the period from August 7, 2012, to March 31, 2014, where Agni Steels Pvt. Ltd. paid a total remuneration of INR 8.7 crore to its directors, which was challenged by the tax authorities as taxable under RCM. The Adjudicating Authority had previously demanded service tax amounting to INR 1.07 crore, along with interest and penalties, on the premise that the remuneration constituted taxable services under the Finance Act, 1994.
The Tribunal, consisting of Judicial Member Mr. P. Dinesha and Technical Member Mr. Vasa Seshagiri Rao, examined the nature of the payments. The Tribunal noted that the directors were full-time employees involved in the daily operations of the company, with their remuneration classified under "Salaries & Wages" in audited financials. The payments were subject to Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act, further solidifying the employer-employee relationship.
The Tribunal's decision leaned heavily on existing judicial precedents and CBEC Circular No.115/9/2009-ST, which supports the exclusion of such payments from the definition of taxable services. Citing cases like Maithan Alloys Ltd., Allied Blenders & Distillers Pvt. Ltd., and Rent Works India Pvt. Ltd., the Tribunal reinforced that remuneration to whole-time directors, treated as salary, is not taxable.
Additionally, the Tribunal criticized the failure of the Adjudicating Authority to consider binding precedents and relevant documents presented by Agni Steels, which constituted a breach of the principles of natural justice.
The ruling not only absolves Agni Steels of the alleged tax liability but also provides a clear directive on the non-applicability of RCM for salaries paid to directors, emphasizing the need for a substantive assessment of employer-employee relationships in such cases. This decision is expected to influence similar disputes, offering relief to numerous corporations facing analogous tax demands.
Bottom Line:
Remuneration paid to Directors, treated as salary, falls under employer-employee relationship and is excluded from service tax under Section 65B(44)(b) of the Finance Act, 1994. Reverse Charge Mechanism (RCM) under Notification No.30/2012-ST is inapplicable for such payments.
Statutory provision(s): Finance Act, 1994 Section 65B(44)(b), Section 68(2), Notification No.30/2012-ST, Service Tax Rules, 1994 Rule 2(1)(d)(i)(EE), CBEC Circular No.115/9/2009-ST.
