Meeting Fees To Whole-Time Directors Not Taxable Under Reverse Charge Mechanism: CESTAT New Delhi

The New Delhi Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 13 July held that meeting fees paid to whole-time directors are not liable to service tax under the Reverse Charge Mechanism (RCM), as such payments arise from an employer-employee relationship and are excluded from the definition of “service” under the Finance Act, 1994.

Judicial Member Binu Tamta and Technical Member P.V. Subba Rao allowed the appeal filed by Oriental Chemical Works and set aside the service tax demand raised against the company. The Bench observed:

“The above provisions are explicit and leaves no manner of doubt that service by an employee to the employer during the course of its employment does not fall within the ambit of service and therefore, the logical conclusion is that no service tax can be imposed thereon.”

The dispute arose after a departmental audit found that Oriental Chemical Works had paid Rs. 7.14 lakh as meeting fees and Rs. 3.30 lakh as director remuneration during 2012-13 and 2013-14.

The Department treated the meeting fees as consideration for services provided by the directors and raised a service tax demand of Rs. 1.29 lakh, along with interest and penalty, under the RCM. The demand was upheld by the adjudicating authority and the Commissioner (Appeals).

Before the Tribunal, Oriental Chemical Works argued that all five directors were whole-time directors and, therefore, employees of the company. It contended that payments made to them, including meeting fees, were part of the employer-employee relationship and excluded from the scope of taxable service under Section 65B(44)(b) of the Finance Act, 1994. The Revenue argued that meeting fees were separately paid for attending board meetings and were therefore liable to service tax under Notification No. 30/2012-ST.

Allowing the appeal, the Tribunal noted that the issue had already been settled in earlier decisions, including those in Rent Works India Pvt. Ltd., PCM Cement Concrete Pvt. Ltd., and Maithan Alloys Ltd. It also observed that a whole-time director holds a position of employment under the Companies Act and is recognised as key managerial personnel. It held that compensation paid to such directors arises from an employer-employee relationship. It added:

“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.”

Further, the Bench relied on a CBEC Circular dated 1 December 2008, which clarified that payments made by an employer to an employee for duties performed under the terms of employment do not become consideration for taxable services merely because they are described differently.

Accordingly, the CESTAT held that meeting fees paid to whole-time directors were covered by the exclusion for services provided by an employee to an employer and set aside the service tax demand against Oriental Chemical Works.

For Appellant: Shri Ayush Agarwal, Shri Rohit Sharma and Shri Mohit Gupta, Advocates

For Respondent: Shri S.K. Meena, Authorised Representative