No Service Tax on Performance Commission Paid to Whole-Time Directors Treated as Salary: CESTAT

The Ahmedabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that performance commission, perquisites and incentive payments made to whole-time directors cannot be subjected to service tax under the reverse charge mechanism when such directors are employees of the company and the payments are treated as salary under the Income Tax Act. The bench of S.S. Garg (Judicial Member) observed that the appellant had produced board resolutions appointing the individuals as whole-time directors and had also submitted Form-16 certificates evidencing deduction of TDS under the salary head. The department had not disputed the employment status of the directors. The ruling came in the case of Champion Jointing Private Limited, where the Tribunal allowed the appeal and set aside the service tax demand, interest and penalties confirmed by the department. The dispute arose after departmental audit authorities alleged that the company had paid “performance commission” and “perquisite fees” to its directors without discharging service tax liability under reverse charge in terms of Notification No. 30/2012-ST as amended by Notification No. 45/2012-ST. According to the department, services provided by directors to a company constituted taxable services and attracted service tax liability on the recipient company. Based on this allegation, a show cause notice dated 25 September 2014 was issued demanding service tax of Rs. 11.12 lakh along with interest and penalties under various provisions of the Finance Act, 1994. The adjudicating authority confirmed the demand, which was subsequently upheld by the Commissioner (Appeals), leading to the present appeal before the Tribunal. Before the Tribunal, the company argued that the entire demand was founded on a misconception that any remuneration paid to directors beyond fixed monthly salary automatically constituted consideration for taxable services. The appellant contended that Section 17(1) of the Income Tax Act specifically includes “fees, commissions, perquisites or profits in lieu of or in addition to salary” within the ambit of salary itself. The company further submitted that the concerned individuals were appointed as working or whole-time directors through board resolutions and that tax had been deducted at source under the salary provisions through issuance of Form-16. It argued that these documents clearly established an employer-employee relationship between the company and the directors. Relying on Section 65B(44)(b) of the Finance Act, 1994, the appellant argued that services rendered by an employee to an employer in the course of employment are specifically excluded from the definition of “service”. Therefore, once the directors were found to be employees, no service tax could be levied on the remuneration paid to them. The Revenue, however, contended that performance commission and perquisites paid to directors were liable to service tax and that deduction of TDS under the Income Tax Act or passing of board resolutions could not prevent levy of service tax. The Tribunal held that the department’s assumption that any remuneration beyond fixed salary necessarily constituted taxable consideration for independent services was contrary to Section 17(1) of the Income Tax Act, which expressly includes fees, commissions and perquisites within salary. The Bench further observed that the issue was no longer res integra and stood settled by several decisions of the Tribunal, including Ratnamani Metals and Tubes, Sulphur Mills Ltd., Maithan Alloys Ltd., Allied Blenders and Distillers Pvt. Ltd. and Bengal Beverages Pvt. Ltd. CESTAT reiterated that a whole-time director is recognized under the Companies Act as being in full-time employment of the company and forms part of key managerial personnel. Merely because remuneration includes variable pay, commission or incentives does not alter the employer-employee relationship. The Tribunal also noted that tax deduction under Section 192 of the Income Tax Act strongly supported the company’s stand that the payments were salary payments made to employees and not consideration for independent services. The Bench observed that once the Income Tax Department itself treats such payments as salary, the same amounts cannot simultaneously be characterized as taxable services for levy of service tax. The Tribunal held that service tax demand on remuneration paid to whole-time directors was unsustainable. Since the principal demand itself failed, the associated interest and penalties were also set aside. The appeal was therefore allowed with consequential relief. Case Details Case Title: Champion Jointing Private Limited Versus CGST & Central Excise-Surat Citation: JURISHOUR-1208-CES-2026(AHM) Case No.: Service Tax Appeal No. 11862 of 2018 Date: 11.05.2026 Counsel For Appellant: Dhaval K Shah, Advocate Counsel For Respondent: Sunita Menon, Superintendent (AR) Click Here To Read Order Read More: Foreign Markings Alone Can’t Prove Smuggling: CESTAT Quashes Confiscation Of Gold & Cash

No Service Tax on Performance Commission Paid to Whole-Time Directors Treated as Salary: CESTAT

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