The Kolkata CESTAT in its recent ruling in case of Bengal Beverages Pvt Ltd Vs CGST & Excise, Howrah has held that payment of commission or variable pay to whole time director will not be exigible to Service Tax.
Facts of the Case:
- The Appellant is engaged in the manufacture of Aerated water and fruit pulp or juice based drinks, classifiable under Chapter No. 2202 of the Central Excise Tariff Act, 1985 on which central excise duty was being paid.
- In the course of business, the assessee company pays remuneration to its whole-time Directors which has fixed as well as variable component. The said variable component comprised of commission payable on the basis of percentage of profit in conformity with the provisions of the Companies Act.
- The Department has raised a demand of service tax under reverse charge mechanism on the entire remuneration paid to the whole-time Directors i.e. the fixed part as well as the variable pay, in terms of Notification No.30/2012-S.T., dated 20th June 2012, as amended.
- It is the case of the Department that the said remuneration paid to the Directors would constitute ‘service’ liable to service tax in the hands of appellant assessee under reverse charge mechanism.
Issue under Appeal:
The dispute is only in respect of the remuneration amount paid to the four Directors in the form of commission as a percentage of profit who are the wholetime Directors on the Board of the Company.
The Ld. Adjudicating authority has dropped the demand of Rs.99,03,360/- representing service tax on the fixed salary component paid by the appellant to its four whole time Directors as proposed in the SCN.
Order of CESTAT: Deliberation and Ruling
- Section 2(94) of Companies Act, 2013, duly defines ‘whole-time director’ to include a director in the whole-time employment of the company. A whole-time Director refers to a Director who has been in employment of the company on a full-time basis and is also entitled to receive remuneration.
- In our view, 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 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.
- We are thoroughly convinced that when the very provisions of the Companies Act make whole-time director (as also in capacity of key managerial personnel) responsible for any default / offences, it leads to the conclusion that those directors are employees of the assessee company.
- The Ld. Adjudicating authority has also allowed part of the demand on the ground that there exists an employer-employee relationship between the whole time Directors and the appellant assessee, then the ground of confirming the balance demand that the directors have provided service to the company becomes infructuous and hence cannot survive before the eyes of the law.
In view of above deliberations the CESTAT allowed the appeal filed by the Appellant and set side the demand of service tax and further adjudged that penalty and interest are also not sustainable.
Our Comments:
The above judgment will also be applicable under GST law wherein also similar provisions regarding taxability of Directors Remuneration exists. However one need to maintain proper documentation to prove that appointment of director is on whole-time basis, which could be resolution of appointment, the forms filed with the MCA.
The tax deduction under 192 of the Income Tax Act on the remuneration / commission paid would also confirm that such payments are made to whole time directors / employees.
READ / DOWNLOAD ORDER:
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
