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Subject News *  Documentary evidence dominates probe, further custody unwarranted: mumbai court grants bail in Rs. 22.44 crore customs duty evasion case. *  Business premises can’t remain sealed for non-participation in GST search: Allahabad High Court. *  GST pre-deposit must be refunded proportionately when taxpayer partly succeeds in appeal: Bombay High Court. *  Supreme Court grants 30 days to file GST appeal; keeps pre-deposit issue open due to deposit in parallel CGST proceedings. *  GST demand can’t exceed amount proposed in SCN: Allahabad High Court quashes Rs. 20.47 Crore order. *  Hundreds-of-crores GST demand and heavy 10% pre-deposit no ground to bypass statutory appeal: Punjab & Haryana High Court. *  Delhi High Court refuses to entertain challenge to gold confiscation due to statutory appeal remedy and unexplained delay. *  Procedural error in customs broker licence inquiry can be rectified through remand: Delhi High Court. *  GSTR-2A mismatch alone can’t justify ITC denial without invoice-wise verification; personal hearing mandatory: GSTAT. *  GST order passed without uploading personal hearing notices violates sec. 75(4): Allahabad High Court. *  TAX EVASION - Sec. 74 GST SCN quashed for not spelling out fraud, wilful misstatement or suppression: Allahabad High Court. *  STPI’s SOFTEX certification and NoC charges taxable as business support services: CESTAT. *  Suspicion can’t replace proof: CESTAT quashes penalty in alleged gold-smuggling operation. *   Limitation runs from communication of order: Madras High Court upholds rejection of delayed GST Appeals. *  Rajasthan High Court quashes GST demand over unsigned show cause notice. *  ITC recovery upheld where supplier failed to deposit GST: Rajasthan High Court. *  Customs commissioner’s empowered to make port trust liable for duty on pilfered goods: Supreme Court. *  Rectification proceedings can’t be used to challenge an uncontested GST assessment through a writ petition: Andhra Pradesh HC. *  GST proceedings against deceased proprietor unsustainable without notice to legal heir: GSTAT. *  Mere availment of ineligible self-assessed ITC doesn’t amount to suppression without evidence of fraud or wilful misstatement: GSTAT. *  Disposal of mining overburden by entity authorised by mining lease holder constitutes taxable service: CESTAT. *  Toll plaza data not mandatory for ITC refund: GSTAT. *  Disputed GST fraud allegations require investigation: Punjab and Haryana High Court makes interim bail absolute in alleged fraud and GST fraud case. *  Non-manufacturer contractor liable to deposit excess excise duty collected from buyer: CESTAT. *  GST order can’t reject taxpayer’s reply as “not satisfactory” without reasons: Madhya Pradesh High Court. *  Uncorroborated statements can’t establish alleged diversion of duty-free goods: CESTAT. *  Erection services were not liable to service tax prior to 10th september 2004: CESTAT. *  Sec. 74 GST notice must spell out statutory ingredients for invoking extended tax demand proceedings: Allahabad High Court. *  No jurisdictional bar under section 6(2)(b) in parallel CGST SGST proceedings: Delhi High Court refuses to bypass GST appeal remedy. *  Madras High Court remits GST demand for fresh adjudication after taxpayer claims it was unaware of SCN following business closure.  

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PJ/Case Law/2020-2021/3634

Whether commission paid to whole time director based on percentage of profit is taxable under reverse charge mechanism?
S/Shri P.K. Choudhary, Member (J) and V. Padmanabhan, Member (T)MAITHAN ALLOYS LTD. Versus COMMISSIONER OF C. EX. & S.T., BOLPURFinal Order No. 77299/KOL/2018, dated 2-11-2018 in Appeal No. E/75277/2016-DB
Brief Facts: The appellant is a manufacturer of Ferro Alloys on which central excise duty is being paid. In the course of business, the assessee company pays remuneration to its whole-time directors which has fixed as well as variable components. The said variable component comprised of commission payable on the basis of percentage of profit in conformity with the provisions of the Companies Act. The Department has raised demand of service tax under reverse charge mechanism on the said remuneration paid to the whole-time directors, in terms of Notification No. 30/2012-S.T., dated 20-6-2012, as amended. It is the case of the department that the said remuneration paid to the directors would constitute ‘service’ liable to service tax in the hands of assessee under reverse charge mechanism.
Issue:Whether commission paid to whole time director based on percentage of profit is taxable under reverse charge mechanism?
Appellant Contention:The appellant submitted that the whole-time directors are actually salaried employees and whatever remuneration has been paid to the said directors, on which the impugned demand has been raised, has been made exigible to deduction of tax (TDS) under Section 192 of the Income-tax Act, 1961. He also submitted that there is no dispute with regard to the payment of remuneration to other directors, who are not whole-time directors, in as much as service tax is being duly paid under reverse charge. Payment to the said directors are being made upon deduction of income-tax (TDS) under Section 194J of the Income-tax Act, which is applicable for fee paid for technical or professional services. He also submitted that the very definition of ‘service’ under Section 65B(44) of the Finance Act, 1994, excludes the services rendered by employee to the employer, from the levy of service tax.
In support of his contention, he relied upon the decision of the Tribunal in the case of Rent Works India Pvt. Ltd. v. CCE, Mumbai - 2016 (43) S.T.R. 634 (Tri. - Mum.) wherein it is held that there is a difference between salary and consultancy fee inasmuch as when the Income Tax Department considers payment in the nomenclature ‘consultancy fee’ as salaries, on which TDS is also made, the said payments cannot be said towards rendition of taxable service for levy of service tax. He also relied on the decision of the Tribunal in the case of PCM Cement Concrete Pvt. Ltd. v. CCE, Siliguri - 2018 (9) G.S.T.L. 391 (Tri. - Kol.) wherein the Tribunal observed that consideration paid to whole-time directors would be treated as payment of salaries inasmuch as there would be employer-employee relationships and in such cases, there cannot be any levy of service tax. He further relied on the C.B.E. & C. Circular No. 115/9/2009-S.T., dated 31-7-2009, wherein it has been clarified that no service tax is leviable on commission paid to managing directors/whole-time directors, even if the remuneration is termed as ‘commission’, inasmuch as the said managing directors/whole-time directors do not perform consultancy or advisory function. All working and remuneration are shown in balance sheet and submitted to ROC.
Authority Contention: The departmental officers stated that since the directors are paid a variable amount based on the percentage of profit though approved by the Company’s Board, it cannot be said to have constituted the employer-employee relationship, despite the fact that they are whole-time directors. He accordingly prayed for confirming the entire service tax demand.
Judgment and Order:After hearing both side, the following case is not in dispute that service tax has been duly paid on remuneration paid to directors who are not whole-time employee directors. The only dispute herein is for payment of remuneration to whole time directors, which is a fact on record. The provisions of Companies Act, 2013, contained in Section 2(94), duly defines ‘whole-time director’ to include a director in the whole-time employment of the company. A whole-time director refers to a director who has been in employment of the company on a full-time basis and is also entitled to receive remuneration and also consider as Key Management Person.Further, he is an officer in default for any violation or non-compliance of the provisions of Companies Act. Thus, in our view, the whole-time director is essentially an employee of the Company and accordingly, whatever remuneration is being paid in conformity with the provisions of the Companies Act, is pursuant to employer-employee relationship and the mere fact that the whole-time director is compensated by way of variable pay will not in any manner alter or dilute the position of employer-employee status between the company assessee and the whole-time director.Further, in the present case, the appellant has duly deducted tax under Section 192 of the Income-tax Act which is the applicable provisions for TDS on payments to employees. This factual and legal position also fortifies the submission made by the appellant that the whole-time directors who are entitled to variable pay in the form of commission are ‘employees’ and payments actually made to them are in the nature of salaries. This factual position cannot be faulted in absence of any evidence to the contrary. In view of the above discussions, demand of service tax is set aside; penalty and interest are also not sustainable.
 
Comment: In the GST era, applicability of RCM on directors renumeration has been disputed matter since the ruling in case of M/S Clay Crafts India Private Limited has been pronounced. However, (Circular No. 140/10/2020 – GST dated 10th June, 2020) was issued to clarify that whether directors remuneration is covered under Entry No. 1 of Schedule III of CGST Act, 2017 or it is liable to tax under Reverse Charge Mechanism vide Entry No. 6 of N/No. 13/2017- Central Tax (Rates) dated 28th June, 2017. Department has clarified that to determine applicability of GST on director remuneration in case of whole time director, it is pertinent to examine whether service is performed out of “Contract of service” (Employer-employee relationship) or “Contract for Service”. Payment booked as “Salary” in books of accounts of the company and on which TDS is deducted u/s 192 of Income Tax Act, then, such payment is covered under schedule III of CGST Act, 2017 and no GST is applicable on such payment. Payment made other than “Salary” and TDS on which is deducted under section 194J of Income Tax Act, 1961, then, company is liable to pay GST on such payment under RCM. Remuneration to Independent Director would be charged to GST under RCM (Not as Employee of the company).
 
Prepared by CA Kunal Karnawat 
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