Service Tax on Commission paid to Managing Directors/Directors (Whole-time/Independent – Not liable to Service Tax
In DDT 1041 29.01.2009 we raised an issue on applicability of service tax on commission paid to Independent Directors (Non-Executive Directors) of companies based on a letter received from a concerned Netizen.
The concerned Netizen wrote,
I have read today’s DDT and also letter No. Dy.No.324/Comm (Service Tax)/ 2008 dated 01.12.2008 issued by the Commissioner (ST) clarifying that service tax would not be leviable on commission paid to the Directors of the Company.
The circular deals with commission to directors who are employees. What about commission being paid to other non-executive directors?
Please clarify.
We asked a question ‘Can any enlightened Netizen clarify or shall we wait for the Board?’
Earlier in DDT 1039 we reported that Board issued a letter CBEC Dy.No.324/Comm (Service Tax)/2008 : Dated 1st December, 2008 wherein it was clarified that commission paid to Directors/Managing Directors of companies over and above their salary and other remunerations is not taxable as their relationship with the companies is not in the nature of client-service provider but employer-employee and the action taken by the employee for the employer cannot be in the nature of service.
We also asked a question as to why such clarifications are kept in private domain and not circulated for the benefit of the public through an official Circular.
Now the generous CBEC has issued a Circular for the benefit of all service providers clarifying the following issues:
(i) Applicability of service tax under ‘Business Auxiliary service’ on commission paid to Managing Director/Directors (Whole-time or Independent) by the company,
(ii) Applicability of service tax on Independent Directors who are part of the Board of Directors under ‘Management Consultant service’.
Both these issues have been examined by the Board and the CBEC has come out with a clarification as follows:
(i) Some Companies make payments to Managing Director/Directors (Whole-time or Independent), terming the same as ‘Commissions’. The said amount paid by a company to their Managing Director/Directors (Whole-time or Independent) even if termed as commission, is not the ‘commission’ that is within the scope of business auxiliary service and hence service tax would not be leviable on such amount.
(ii) The Managing Director / Directors (Whole-time or Independent) being part of Board of Directors perform management function and they do not perform consultancy or advisory function. The definition of management consultant service makes it clear that what is envisaged from a consultant is advisory service and not the actual performance of the management function. The payments made by Companies, to Directors cannot be termed as payments for providing management consultancy service. Therefore, it is clarified that the amount paid to Directors (Whole-time or Independent) is not chargeable to service tax under the category ‘Management Consultancy service’. However, in case such directors provide any advice or consultancy to the company, for which they are being compensated separately, such service would become chargeable to service tax.
In view of the above, it is clarified that remunerations paid to Managing Director/Directors of companies whether whole-time or independent when being compensated for their performance as Managing Director/Directors would not be liable to service tax.
TIOL thanks the Board for coming out with a suitable clarification though belatedly. Better late than NEVER. We also thank the concerned Netizen for raising a relevant question to seek an answer which was not found in the earlier clarification issued by the Board on 01.12.2008 in their private communication to the Commissioner.
CIRCULAR NO. Dated : July 31, 2009