2026-VIL-919-CESTAT-CHE-ST
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SERVICE TAX CESTAT Cases

Service Tax – Demand of Service Tax on Directors’ Remuneration under Reverse Charge Mechanism - Employer-employee relationship, tax deduction at source under section 192 of the Income Tax Act and issuance of Form 16 - Whether remuneration paid to whole-time directors functioning as employees attracts service tax under RCM – HELD - The demand of service tax on remuneration paid to whole-time directors cannot be sustained as the provision of service by an employee to the employer in the course of or in relation to his employment is specifically excluded from the definition of service under section 65B(44)(b) of the Finance Act, 1994. A whole-time director is recognized as key managerial personnel under the Companies Act and is held responsible for any default or violation, thereby establishing an essential employer-employee relationship - The fact that whole-time directors receive variable pay in the form of commission or profit-sharing does not alter their employee status. Tax deduction at source under section 192 of the Income Tax Act and issuance of Form 16 corroborate the employer-employee relationship – 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 /Appellant and the whole-time Directors - Further, when the original show cause notice on which the subsequent demands were based has been set aside by the Tribunal in the company's own earlier appeal, the subsequent demand notices relying on the same grounds cannot sustain - For non-whole-time directors, where the company has discharged service tax liability through its separate office and filed service tax returns disclosing the same, the demand cannot be made from another office in the absence of centralized registration and without any evidence showing that these directors also rendered services to that office during the relevant period - The impugned orders are set aside and the appeals are allowed
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