Rent Paid to Directors in Personal Capacity Not Taxable Under Reverse Charge Mechanism: CESTAT [Read Order]

The New Delhi Principal Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that rent paid by a company to its Directors in their individual capacity is not subject to service tax under the Reverse Charge Mechanism (RCM).

PSV Polymers Pvt. Ltd., the appellant, is a manufacturer and exporter of guar gum powder and avails CENVAT credit on inputs and input services. During an audit, the department noticed that the appellant had paid Rs. 75.43 lakh to foreign agents between April 2010 and September 2014 for procuring export orders and had also paid Rs. 5.32 lakh as rent to one of its Directors for leasing a godown from July 2010 to August 2015.

The department issued a show cause notice alleging that service tax was payable under the Reverse Charge Mechanism on both these payments and raised a demand of Rs. 9.98 lakh along with interest and penalties.

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The appellant’s counsel submitted that the rent was paid to the Director in his personal capacity as the owner of the godown, and not in his official capacity, and service tax was not applicable under RCM. The counsel further argued that all transactions were properly recorded in their books and payments were made through banking channels, showing no intent to evade tax.

The revenue counsel argued that after Notification No. 45/2012-ST, companies are liable to pay service tax on services received from Directors, including rent payments.

The two-member bench comprising Binu Tamta (Judicial Member) and Hemambika R. Priya (Technical Member) referred to earlier rulings in Cords Cable Industries Ltd. and Varaha Infra Ltd., where it was held that rent paid to Directors in their personal capacity as owners of the premises does not attract service tax under RCM. Applying the same logic, the tribunal held that no service tax was payable on the rent in this case.

The tribunal did not examine the issue of limitation but noted that in revenue-neutral situations, the extended period of limitation is generally not applicable. The impugned order was set aside, and the appeal was allowed.

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