CESTAT Chennai Holds Remuneration Paid To Thriveni Earth Movers Directors Not Service Taxable

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has recently set aside service tax demands raised on remuneration paid by Thriveni Earth Movers Pvt. Ltd. to its whole-time directors.

The tribunal held that such remuneration could not be subjected to service tax because the directors were working in an employer-employee relationship with the company.

A coram of Judicial Member Ajayan T.V. and Technical Member M. Ajit Kumar allowed the company's appeals against a common order. The order had confirmed service tax demands, interest and penalties on directors' remuneration for the period from April 2014 to June 2017.

“The issue of payment of service tax on the remuneration paid to the Directors is no more res-integra where it is termed as salary and subjected to TDS under Section 192 of the Income Tax Act, the employer and employee relationship gets established and the same is excluded from the purview of the service tax,” the tribunal observed.

Thriveni Earth Movers, a company engaged in providing mining services, was earlier issued a show-cause notice demanding service tax on remuneration paid to its directors for the period from August 2012 to March 2014. The notice alleged that services provided by directors to a company became liable to service tax under the reverse charge mechanism following a notification issued in August 2012.

The proceedings culminated in an order confirming the demand, interest, and penalties. Thereafter, the department issued three Statements of Demand for subsequent periods. These covered April 2014 to March 2015, April 2015 to March 2016 and April 2016 to June 2017. The demands were subsequently confirmed through a common adjudication order.

Before the Tribunal, the company contended that all its whole-time directors had entered into individual employment agreements with it. It argued that the directors worked on a full-time basis and were employees of the company. The company also submitted that tax was deducted from their remuneration under the provisions applicable to salaries and that Form 16 certificates had been issued to them.

The company further argued that services rendered by employees to their employer are outside the scope of service tax. It relied on the employment agreements and related documents to establish the existence of an employer-employee relationship.

The tribunal noted that written employment agreements had been entered into with the directors. It also noted that remuneration paid to them had been subjected to tax deduction as salary and that Form 16 certificates had been issued.

“We find an exclusive clause at 3.4 of the employment agreement that this constitutes an employee-employer relationship between the company and the Director,” the Tribunal held.

The bench also noted that the directors were responsible for managing the day-to-day affairs of the company. It observed that they were not merely providing advisory services.

“We find that these Executive Directors were delegated with the work of managing the day-to-day affairs of the Company and they were not giving any advice to the Company in order to term them as service providers to levy service tax,” the tribunal observed.

The Tribunal further noted that the directors were required to work on a full-time basis for the company. It also referred to the company's contention that the directors were not permitted to engage in any other employment or business activity without prior approval.

The company additionally challenged the demand relating to remuneration paid to two non-whole-time directors, Anshuman Patnaik and Anurag Patnaik. It contended that service tax on those payments had already been discharged through its Bhubaneswar office.

According to the company, the two directors worked from the Bhubaneswar office after it was established in July 2015. It submitted that the consideration for their services was paid from that office and that the corresponding service tax liability had been disclosed in ST-3 returns filed by the Bhubaneswar office.

The Tribunal found merit in this contention. It noted that the company had produced ST-3 returns showing payment of service tax in respect of the two non-whole-time directors. It also observed that the adjudicating authority had not undertaken any verification of those returns through the jurisdictional officers at Bhubaneswar.

The Bench further noted that there was nothing on record to show that the Bhubaneswar authorities had disputed the payment of service tax claimed by the company.

“when it was the Appellant‟s Bhubaneshwar Office were the said non-Whole Time Directors were engaged and were discharging their duties, given that there was no centralized registration, the question of demanding service tax at the Salem Office of the Appellant does not arise,” the tribunal observed.

The tribunal also noted that the Revenue had not produced any evidence to show that the two non-whole-time directors rendered services to the Salem office during the relevant period.

The bench observed that it had already decided the same issue in the company's favour in an earlier appeal relating to the original show-cause notice.

It also referred to several tribunal decisions, including Maithan Alloys Ltd., Allied Blenders & Distillers Pvt. Ltd., Alchemie Organics, Lilanand Magnesites Pvt. Ltd., Dixcy Textiles Pvt. Ltd. and Vinayaka Electro Alloys Pvt. Ltd., which had taken a similar view.

Holding that remuneration paid to whole-time directors employed by the company could not be subjected to service tax, the tribunal set aside the impugned orders in their entirety. The appeals were allowed with consequential relief.

For Appellant: Prateek Marlecha, Chartered Accountant

For Respondent: G. Krupa, Authorised Representative