Remuneration Paid to Whole-Time Directors Not Taxable under RCM: CESTAT [Read Order]

The Chennai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that remuneration paid to whole-time directors is not taxable under the Reverse Charge Mechanism (RCM) as such directors are employees of the company and not service providers.

Vinayaka Electro Alloys Pvt. Ltd., the appellant, is engaged in the manufacture of alloy and stainless-steel castings. During a departmental audit, it was found that the company had paid remuneration to three of its directors for the period from 7 August 2012 to 31 March 2014.

The department treated this remuneration as a taxable service provided by the directors to the company and issued a show cause notice demanding service tax of Rs. 4,67,208 under RCM along with interest and penalties.

The original adjudicating authority dropped the proceedings, accepting that the directors were employees and their services fell outside the scope of taxable services. The department filed an appeal. The Commissioner (Appeals) reversed the decision, confirming the tax demand and penalty. Aggrieved by this order, the appellant approached the CESTAT.

The appellant’s counsel argued that the directors were executive directors appointed through board resolutions to manage the company’s day-to-day operations. They received fixed monthly remuneration, were covered under TDS as salary income under Section 192 of the Income Tax Act, and did not provide any consultancy or advisory services.

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They explained that there was a clear employer-employee relationship, and under Section 65B(44) of the Finance Act, services provided by an employee to the employer in the course of employment are excluded from the definition of taxable service.

The department’s counsel argued that services provided by directors became taxable from 7 August 2012 and that the remuneration was in the nature of consideration for services rendered. They argued that the company had not proved the employer-employee relationship clearly.

The two-member bench comprising Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) observed that the directors were appointed as whole-time directors through board resolutions and received salary subject to TDS under Section 192, which supported their status as employees. It referred to CBEC Circulars and previous tribunal rulings that clarified whole-time directors, if functioning as employees, are not liable for service tax under RCM.

The tribunal further observed that the directors were not engaged in providing independent services to the company but were working in an employment capacity. Therefore, there was no taxable service involved. The tribunal set aside the Order-in-Appeal and allowed the appeal, holding that no service tax was payable under RCM on the remuneration paid to whole-time directors.

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