By TIOL News Service

MUMBAI, JAN 02, 2019: THE appellant is registered for providing various taxable services.

On scrutiny of their records, the audit team noticed that the appellant had been receiving services from the directors, but failed to discharge service tax under reverse charge mechanism, on the remuneration paid, in accordance with Notification 30/2012-ST as amended by 45/2012-ST.

Consequently, demand notice was issued for recovery of service tax of Rs. 2,48,67,525/- on the remuneration paid to the directors during the period from July 2012 to March 2015.

The CCE & ST, Aurangabad confirmed the demand along with interest and equal penalty.

In appeal before the CESTAT, the appellant took shelter of clause (b) of the definition of 'service' contained in section 65B(44) which reads "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include - a provision of service by an employee to the employer in the course of or in relation to his employment.

It is also inter alia submitted that there is no bar under the earlier or present Companies Act, 2013 for an employee to be director of the company; that the adjudicating authority had failed to appreciate that a person who has been appointed as a director on board of directors can simultaneously be in the whole time employment of the company as in the present case. The appellant also placed sample copies of the returns filed with the Provident fund authority evidencing contribution to the fund as also deduction from the employees' salaries of their share of the provident fund and further submitted that the directors in question were indeed whole-time directors, who were assigned specific managerial functions and looked after the day-to-day affairs of the company and performed the duties assigned to them by the board of directors; that they were employees who were paid remuneration for the labour and the mere fact that they were also designated as Directors on the board of the company did not militate against their function in the capacity of employee of the company; that the adjudicating authority had misunderstood the use of word 'Malik' to address the directors of a company and which observation is too pedantic as to have any legal significance. The ground of the demand being hit by limitation is also taken by the appellant.

The AR submitted that in the Employees Provident Funds and Miscellaneous Provisions Act, 1952, 'employer' has been defined to include 'managing director'; that the plea of the appellant that the Directors are being paid salary, HRA, PF and Form-16 issued after deduction of TDS and hence are to be treated as an employee, is not correct, as the employer-employee relation is not supported by the Article of Association/Memorandum of Association or any separate agreement between the company and the Directors; that statutory provident fund (PF) is being deducted from the salary of Chairman's remuneration, 15% PPF for Mr. Deepak Roy , whereas no PF for Mr. Ganguli Utpal was deducted, which shows that PF contribution cannot be considered as one criteria to decide the relationship of employer and employee; that in the negative list w.e.f 01.07.2012, the appellants are eligible to exemption only if they prove with the documents and substance that the persons in fact are employees of the company.

The Bench considered the submissions and observed thus -

+ In the present case, the Board of Directors (BOD) are empowered to appoint under clause 93 of the Articles of Association, Managing Director and Whole-time Director with such conditions as may deem fit.

+ Also, the appointed Directors could be removed from their post by the Appellant company as per clause 94 of the Articles of Association.

+ All the four Directors were appointed by the resolutions passed by the Board of Directors (BOD).

+ Appellant have placed on record the Form-16 issued by the appellant indicating deduction of income tax at source on the salary paid to each of the Directors. Besides, the appellant had also produced the contribution made to the Employees Provident Fund for each of the Directors, as required in case of other employees under the relevant Laws. The statement furnished for all the employees by the Appellant reflects the name of the directors also.

+ Similarly, the Form-32 as required to be filed under the Companies Act, with the Registrar of companies, the four directors are shown as executive directors indicating that they are employees of the company.

+ All the necessary deductions on account of Provident Fund, Professional Tax and TDS under Section 192 of the Income Tax Act are made as applicable; also they were issuing Form-16 like it is issued to all other employees. Even in the salary return filed by the appellant company before the Income Tax authorities, the director's names have been included. The company does not pay the director's sitting fee to any of the directors. To discredit the said statement, no contrary evidence was produced by the Revenue to establish that the directors are not involved in the day- to-day function of the Company, but participate only in Board Meetings and consequently paid remuneration.

+ From the documents produced by the Appellant it is crystal clear that the Directors who are concerned with the management of the company, were declared to all statutory authorities as employees of the company and complied with the provisions of the respective Acts, Rules and Regulations indicating the Director as an employee of the company. No contrary evidence has been brought on record by the Revenue to show that the Directors, who were employees of the appellant received amount which cannot be said as 'salary' but fees paid for being Director of the company. The Income Tax authorities also assessed the remuneration paid to the said directors as salary, a fact that cannot be ignored.

Finding no merit in the impugned order, the same was set aside and the appeal was allowed.

(See 2019-TIOL-25-CESTAT-MUM)