CESTAT Overturns Service Tax Ruling, Remands Case for Re-evaluation of Employment Contracts and Tax Liability [Read Order]

The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) in Mumbai overturned a service tax ruling against Garware Polyester Ltd, remanding the case to the original authority for re-evaluation.

The dispute centred on whether remuneration paid to the company’s managing director and whole-time directors should be subject to service tax under the reverse charge mechanism (RCM). 

The appellant, Garware Polyester Ltd, had declared a tax liability of Rs. 8,58,164 under the Voluntary Compliance Encouragement Scheme (VCES), 2013, for the period from 2008-09 to 2011-12. The Commissioner of Central Excise and Customs, Aurangabad, rejected the declaration, alleging an additional tax liability of Rs. 35,12,757 for the period from August to December 2012. The tax demand was based on the contention that the remuneration paid to the managing director and whole-time directors constituted taxable services under Rule 2(1)(d)(i)(EE) of the Service Tax Rules, 1994, and Section 66B of the Finance Act, 1994. 

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The company contended that the directors were employees, and their remuneration fell outside the scope of taxable services as per Section 65B(44) of the Finance Act, 1994, which excludes services provided by employees to employers. The adjudicating authority was of the opinion that the directors were not employees but representatives of the Board, performing strategic and managerial functions, and thus their remuneration was taxable. 

CESTAT observed that the adjudicating authority failed to examine the terms of employment or the statutory framework governing the directors’ roles. The Tribunal noted that the tax liability could not be determined without scrutinising the employment contracts.

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It further noted that “the tax liability in the present instance could not have been determined unless with, and except by, reference to the contract of employment. In the absence of such

enquiry, and further finding thereof in the impugned order, the determination that the claim under the Voluntary Compliance Encouragement Scheme (VCES), 2013, is false, and, thereby, warranting discard is not tenable.”

The tribunal comprising CJ Mathew (Technical Member)  and Ajay Sharma (Judicial Member)  set aside the impugned order and remanded the matter back to the original authority.

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To Read the full text of the Order CLICK HERE

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