Remuneration Paid To Whole-Time Directors As Commission Based On Profit Doesn't Attract Service Tax: CESTAT

The Ahmedabad Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that remuneration paid to whole-time directors as commission based on profit doesn't attract service tax.

The bench of Sulekha Beevi C.S. (Judicial Member) and C.L. Mahar (Technical Member) has observed 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 the 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.

The appellant/assessee is in the business of manufacturing floated glass, falling under Chapter 70 of the First Schedule to the Central Excise Tariff Act, 1985, and they are also registered for service tax-related matters. During the course of the audit for the financial year 2013–14 and on the scrutiny of the balance sheet and other financial records of the appellant, the officers of the department observed that the appellant had paid an amount as commission on profit to one of the directors.

The department entertained the view that, as per the provisions of Section 65B (44) of the Finance Act, 1994, 'every activity carried out by a person for another person, for some consideration, is considered a service' and the same is accordingly liable for service tax as per the provisions of the Finance Act, 1994. The exception from this provision has been provided under Section 65B (44)(b) of the Finance Act, 1994, wherein it has been provided that “a provision of service by an employee to the employer in the course of or in relation to his employment.”

The department was of the view that the service provided by the director on a commission basis to the appellant is taxable to service tax, and the appellant was required to pay service tax on a reverse charge basis as per the provisions of Section 68(2) of the Finance Act, 1994, read with Rule 2(1)(d)(i)(EE) of the Service Tax Rules, 1994.

The department issued a show cause notice demanding service tax under the provisions of Section 73(1) of Chapter 5 of the Finance Act, 1994. The provisions of demanding interest as per Section 75 and penalty as provided under Section 78(1) of the Finance Act, 1994, have also been invoked. The matter was adjudicated, and all the charges as invoked in the above-mentioned show cause notice were confirmed by the adjudicating authority.

The appellant contended that there is no concept of a temporary or permanent employee relevant to the service tax. The fact that the employer-employee relationship does not undergo a change on the basis of the temporary or permanent nature of the employment. A temporary employee would also be an employee, and the relationship with the employer would be that of an employee or employer. The distinction made by the adjudicating authority is not legally sustainable. Section 317 of the Companies Act, 1956, wherein it has been provided that the appointment of a director would always be made for a specific period, and it has further been provided under the Act that no company shall appoint any individual as its managing director for a term exceeding five years at a time.

The tribunal held that when the very provisions of the Companies Act make a whole-time director (as well as key managerial personnel) responsible for any defaults or offences, it leads to the conclusion that those directors are employees of the assessee company.

Counsel For Appellant: S J Vyas

Counsel For Respondent: G Nair

Case Title: Gujarat Guardian Ltd. Versus C.C.E-Bharuch

Case No.: Service Tax Appeal No. 11779 of 2016- DB

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