Service Tax Under RCM Not Applicable to Whole-Time Directors' Salaries Under Notification No. 45/2012-ST : CESTAT Chennai

The Chennai Regional Bench of the Customs, Excise and Service Tax Appellate Tribunal has clarified a long-standing ambiguity in service tax jurisprudence by holding that remuneration paid to whole-time directors, when structured as salary under an employer-employee relationship, is not subject to service tax under the reverse charge mechanism. This decision reinforces the exclusion under Section 65B(44)(b) of the Finance Act, 1994, and aligns with the principle that statutory employment status overrides fiscal characterization.

Background & Facts

The Dispute

The Appellant, Thriveni Earth Movers Pvt. Ltd., a company registered under the Companies Act, 1956, was assessed for service tax on remuneration paid to its Directors for the periods 07.08.2012 to 31.03.2014, 01.04.2014 to 31.03.2015, 01.04.2015 to 31.03.2016, and 01.04.2016 to 30.06.2017. The Revenue contended that such payments constituted taxable services under the reverse charge mechanism (RCM) as per Notification No. 45/2012-ST dated 07.08.2012, which amended Notification No. 30/2012-ST.

Key Facts

• The Appellant had entered into written employment agreements with all seven Directors, including Clause 3.4 explicitly stating an employer-employee relationship.
• The Directors were designated as whole-time directors under the Companies Act, 1956, and were classified as Key Managerial Personnel under Section 2(51).
• The Appellant deducted Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act, 1961, and issued Form 16 to each Director.
• The remuneration included fixed salary and variable components such as profit-linked bonuses and commissions.
• The Appellant operated a branch office in Bhubaneswar, Orissa, from which two non-whole-time Directors (Mr. Anshuman Patnaik and Mr. Anurag Patnaik) rendered services from July 2015 onwards.
• For the period April 2016 to June 2017, the Bhubaneswar office discharged service tax under RCM on payments to these non-whole-time Directors, as reflected in Serial No. A-9 of their ST-3 returns.
• The Appellant did not hold a centralized registration under service tax laws.

Procedural History

• 29.09.2014: Show Cause Notice No. 81/2014 (ST) (Commr.) issued demanding service tax for the period 07.08.2012 to 31.03.2014.
• 23.10.2015: Order in Original No. 15/2015 passed by Commissioner of Central Excise, Salem, confirming demand of Rs. 2,11,78,118/- plus interest and penalty.
• 24.02.2016: Statement of Demand No. 2/2016 issued for period 01.04.2014 to 31.03.2015.
• 11.04.2018: Statement of Demand No. 03/2018-ST (ADC) issued for period 01.04.2015 to 31.03.2016.
• 29.03.2019: Statement of Demand No. 6/2019 issued for period 01.04.2016 to 30.06.2017.
• 31.08.2021: Common Order in Original No. 14-16/2021 confirmed demands, interest and penalties under Section 76 of the Finance Act.
• 2016: Appeal No. 40102/2016 filed against Order in Original No. 15/2015.
• 30.07.2025: CESTAT Chennai, in Final Order No. 40776/2025, set aside Order in Original No. 15/2015 in favor of the Appellant.
• 2021: Present appeals (No. 40807, 40808, 40809 of 2021) filed against the 2021 Common Order.
• 16.02.2026: Hearing conducted.
• 27.05.2026: Final Order pronounced.

Relief Sought

The Appellant sought:

• Setting aside of the Common Order in Original No. 14-16/2021 dated 31.08.2021.
• Cancellation of service tax demand for all periods under challenge.
• Cancellation of interest and penalties imposed under Section 76.
• Recognition that service tax liability, if any, for non-whole-time Directors had been discharged by the Bhubaneswar office.

The Legal Issue

The central question was whether remuneration paid to whole-time directors, who are employed under formal employment agreements, subject to TDS under Section 192 of the Income Tax Act, and recognized as Key Managerial Personnel under the Companies Act, 1956, constitutes a taxable service under the reverse charge mechanism, or whether it falls within the exclusion under Section 65B(44)(b) of the Finance Act, 1994 as a service provided by an employee to an employer in the course of employment.

Arguments Presented

For the Appellant

The Appellant’s Chartered Accountant contended that:

• The definition of service under Section 65B(44)(b) explicitly excludes services provided by an employee to an employer in the course of employment.
• The employment agreements, Form 16, and TDS deductions under Section 192 conclusively establish an employer-employee relationship.
• The Companies Act, 1956, recognizes whole-time directors as officers in default and key managerial personnel, reinforcing their status as employees.
• The Tribunal’s own prior decision in Final Order No. 40776/2025 had already settled this issue in the Appellant’s favor.
• For non-whole-time Directors, service tax had been discharged by the Bhubaneswar office, as evidenced by ST-3 returns, and the Salem office had no jurisdiction to levy tax on services received elsewhere.
• Reliance was placed on Maithan Alloys Limited v. CCE & ST, Allied Blenders and Distillers Pvt Ltd v. CCE & ST, Alchemie Organics v. CCE & ST, and Lilanand Magnesites Pvt Ltd v. CCE & ST.

For the Respondent

The Respondent, through its Authorized Representative, reiterated the Adjudicating Authority’s findings that:

• The Directors were not employees but service providers, as their remuneration included variable components like profit-linked commissions.
• The absence of a formal appointment order (beyond employment agreements) cast doubt on the employment relationship.
• The reverse charge mechanism applied as the services were not covered under any exemption.
• The ST-3 returns from Bhubaneswar were not independently verified and could not be accepted without corroboration.

The Court's Analysis

The Tribunal conducted a comprehensive review of statutory provisions, judicial precedents, and factual evidence. It emphasized that the exclusion under Section 65B(44)(b) is not contingent on the nature of remuneration (fixed or variable) but on the existence of an employer-employee relationship.

"The provision of Section 65B(44) of the Finance Act, 1994 reads as given below: - ... (b) a provision of service by an employee to the employer in the course of or in relation to his employment; ..."

The Tribunal noted that the Appellant had not merely claimed an employment relationship but had substantiated it with:

• Written employment agreements containing explicit employer-employee clauses.
• TDS deductions under Section 192 and issuance of Form 16, which the Income Tax Department treats as conclusive evidence of salary.
• Recognition of Directors as Key Managerial Personnel under Section 2(51) of the Companies Act, 1956, and as officers in default under Section 2(60).

The Tribunal further relied on its own binding precedent in Final Order No. 40776/2025, which had already held that:

"...the activity of appointment of Directors and their services is covered under Negative List of services prescribed under Section 65B (44) (b) of the FA 1994 and so it follows that the impugned Order-in-Original No. 15/2015 (ST-Commr.) dated 23.10.2015 is not tenable."

The Tribunal also rejected the Revenue’s argument regarding jurisdiction over non-whole-time Directors. It held that:

• The services were rendered from the Bhubaneswar office.
• Service tax had been discharged there under RCM, as evidenced by ST-3 returns.
• The absence of centralized registration meant that the Salem office could not be held liable for services received at another location.
• The Revenue failed to disprove the ST-3 returns or seek verification from the Bhubaneswar jurisdiction.

The Tribunal concluded that the Adjudicating Authority’s failure to provide the Appellant an opportunity to cure any perceived deficiency in evidence violated principles of natural justice.

The Verdict

The Appellant succeeded in full. The Tribunal set aside the Common Order in Original No. 14-16/2021 dated 31.08.2021 in its entirety. The service tax demand for all periods under challenge - including the periods 07.08.2012 to 31.03.2014, 01.04.2014 to 31.03.2015, 01.04.2015 to 31.03.2016, and 01.04.2016 to 30.06.2017 - was cancelled. All interest and penalties imposed under Section 76 of the Finance Act were also set aside. The Tribunal directed that no further proceedings be initiated on the same grounds.

What This Means For Similar Cases

Employer-Employee Status Overrides Remuneration Structure

• Practitioners must now argue that variable pay (bonuses, commissions, profit shares) does not negate an employer-employee relationship if formal employment agreements, TDS deductions, and Form 16 are in place.
• The Companies Act’s classification of whole-time directors as Key Managerial Personnel and officers in default is a decisive factor in establishing employment status.
• Revenue authorities cannot rely on the nature of payment alone to classify director remuneration as a taxable service.

Jurisdictional Limitations Under Non-Centralized Registration

• Service tax liability under RCM must be discharged at the location where services are received.
• If a company operates multiple offices without centralized registration, tax liability cannot be imposed on a non-receiving office merely because it is the registered entity’s principal place.
• ST-3 returns filed by the receiving office, if properly maintained and submitted, constitute prima facie evidence of compliance.

Precedent Binding on Coordinate Benches

• A decision by one bench of CESTAT on a factual and legal issue involving the same assessee is binding on other benches in subsequent proceedings.
• Revenue cannot re-litigate the same issue under different SODs if the original SCN and adjudication have been set aside.
• Failure to verify documentary evidence (e.g., ST-3 returns) before imposing demand constitutes a procedural flaw warranting quashing.