Background
Whole-time directors were paid remuneration in the form of commission (based on percentage of profits). The Revenue demanded service tax on such variable pay.
Decision
A whole-time director is one who is in full-time employment of the company, for which he is entitled to receive remuneration. Hence, it was held[1] by the Hon’ble CESTAT (Kolkata) that such remuneration paid in conformity with the Companies Act is pursuant to employer-employee relationship. Merely since the remuneration is in the form of variable pay would not dilute or alter the employer-employee relationship.
Payments made to whole-time directors are in the nature of salary. Such factual position cannot be faulted in the absence of evidence to the contrary. When the learned adjudicating authority has allowed part of the demand (viz., the fixed pay) on the grounds of employer-employee relationship, it is infructuous to confirm the balance demand (viz., the variable pay) on the premise that directors have provided services to the company. Hence, there is no service tax liability on such payments.
[1] Excise Appeal No. 77570 of 2018; Final Order No.75561/2020 dated October 09, 2020
Comments
The aforesaid ruling (in the context of service tax) would apply in the GST regime too. However, many taxpayers fail to maintain proper documents as required under the Income-tax Act and the Companies Act, which weakens their stand.
Readers should distinguish the differential tax treatment for non-whole-time directors. For a detailed study, readers may refer the following article: http://vsrca.in/service-tax/director-remuneration/
