CESTAT Ahmedabad Says Payments Beyond Fixed Salary To Whole-Time Directors Not Automatically Taxable Service

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad has set aside a ₹11.12 lakh service tax demand against Champion Jointing Private Limited over performance commission and perquisites paid to its whole-time directors.

Judicial Member S.S. Garg held: “The entire demand proceeds on a misconception of law, namely that any remuneration paid by a company to its directors beyond fixed monthly salary must be regarded as consideration for independent taxable service.”

The dispute arose after the department found during the audit that the company had paid performance commission and perquisite fees to its directors without paying service tax under the reverse charge mechanism.

Champion Jointing argued that the directors were appointed as whole-time directors and functioned as employees of the company. It said their remuneration was treated as salary under the Income Tax Act, with board resolutions recording their appointment, Form-16 certificates issued, and tax deducted at source under salary provisions.

The tribunal accepted the company's case, noting that commissions and perquisites are included within the definition of salary under the Income Tax Act.

“The issue is no more res integra and has been settled by various Benches of the Tribunal including the Division Bench of CESTAT, Ahmedabad,” the tribunal said.

The revenue argued that performance-linked payments could still attract service tax despite the company treating them as salary.

However, relying on its earlier rulings in Ratnamani Metals and Tubes, Sulphur Mills, and Maithan Alloys, the tribunal set aside the impugned order and allowed the appeal with consequential relief.