2024 (5) TMI 566 - AT - Service Tax

Non-payment of service tax - amount paid to Directors as Directors Remuneration against services given by the Directors - employees or not - N/N. 30/2012-Service Tax dated 20.06.2012 as amended vide N/N. 45/2012- Service Tax dated 7th August 2012 - Reverse Charge Mechanism. Whether or not the amount in question was given to the whole time directors of the appellant for them being the employees of the appellant? - HELD THAT - The amount in question is an amount paid to whole time Directors and that the amount of remuneration which has been paid to non-whole time directors the service tax liability stands already discharged. On perusal of the definition of Director given under Section 2(94) of Companies Act 2013. It is observed to be an inclusive definition according to which the Director who is an employee of the company is the whole time director. In the Companies Act Section 149(6) simultaneously define independent directors as those who should not have been the employee or proprietor or the partners of the company. The definition of service given in the Section 66B (44) clarifies that a provision of service by an employee to the employer in the course of or in relation to his employment is excluded from the definition of service. It becomes abundantly clear that the amount in question since is an amount paid by the appellant to its whole time directors who are none but the appellant s employee the relationship between the two cannot be categorized as an activity of service being rendered by the said directors. The question of any tax liability on the said amount does not at all arises. The adjudicating authority below has in fact accepted the said contention however still has confirmed the demand based on the difference of figures in the balance sheet versus the returns - Whatever remuneration paid to them even if i.e. over and above the amount of salary i.e. the remuneration arising out of the relationship of employer and employee. The statute itself excludes that relationship from the scope of service. The taxability has wrongly been fastened upon the appellants. The adjudicating authority has relied merely upon the difference between the values of balance sheet and Form 16. Both the documents are submitted for the different purposes. The figures recorded in the balance sheet are for accounting purpose whereas the figures in Form 16 are for tax deduction purpose. In balance sheet and profit and loss account the expenses are recorded on accrual basis regardless of the fact whether they have been paid for or not whereas Form 16 is issued on the basis of remuneration actually disbursed to the executive directors after deduction of their TDS. Hence there can be no possibility of the figures in both the documents to match. The findings arrived upon after comparison of the two documents are nothing but are held to be the outcome of presumption. Hence are not sustainable. There is also no denial that the ST-3 returns containing all requisite details were being duly filed by the appellant. The alleged demand has already been held non-sustainable. In these circumstances there are no cogent evidence produced by the department which could demonstrate suppression. Hence the extended period has wrongly been relied upon. The impugned order set aside - appeal allowed.

Summary

Issues Involved:
The primary issue in this case is whether the amount paid to whole-time directors of the company is subject to service tax under the Reverse Charge Mechanism. The secondary issue involves the interpretation of the definition of "service" under the Finance Act, 1994, and the applicability of service tax on remuneration paid to directors.

Issue 1: Liability of Service Tax on Amount Paid to Directors:
The appellant, engaged in taxable services, was audited for not paying service tax on the amount paid to directors as 'Directors Remuneration.' The Department alleged that the activities for which the remuneration was paid fall under taxable services. The Show Cause Notice proposed a service tax amount, which was confirmed in the Order-in-Original. The appellant contended that service tax was not applicable to remuneration paid to directors who were employees of the company.

Issue 2: Interpretation of Service Tax Liability on Director's Remuneration:
The appellant argued that remuneration paid to executive directors, who were full-time employees, did not attract service tax. They highlighted that service tax is not payable in cases of full-time directors. The appellant also disputed the demand for service tax under Reverse Charge Mechanism, citing the exclusion of service provided by an employee to the employer from the definition of service. The appellant relied on various legal precedents to support their argument.

Judgment Summary:
The Tribunal observed that the remuneration paid to whole-time directors, who were employees of the company, did not constitute a taxable service. The definition of directors under the Companies Act clarified the distinction between whole-time and independent directors. The Tribunal emphasized that the relationship between employer and employee was excluded from the definition of service under the statute. The Department's circulars further supported that payments to whole-time directors were akin to salary and not subject to service tax.

The Tribunal found no infirmity in the appellant's argument and set aside the order under challenge. It held that the demand for service tax on remuneration paid to whole-time directors was not sustainable. The Tribunal also noted discrepancies in the comparison of balance sheet figures and Form 16, emphasizing that payments to whole-time directors should be treated as salary. Additionally, the Tribunal found the extended period for raising the demand was wrongly relied upon, as the appellant had duly fulfilled their tax obligations for non-whole time directors.

In conclusion, the Tribunal allowed the appeal, setting aside the order and ruling in favor of the appellant.