Whether remunerations paid to Managing Director / Directors of companies whether whole-time or independent when being compensated for their performance in form of commission, would be liable to service tax?
The term “Commission” has not been ever more abused than that in the arena of Service Tax. Business Auxiliary Services is one such service where the Department feels comfortable to classify any service which does not fit in the ambit of other services. In other words, wherever a word Commission arises in the books of accounts or whenever there is no particular service where an activity can be classified, the same is made taxable under the Business Auxiliary Services under Section 65 (19). In recent past, many ambiguities with respect to Call Centers, Medical Transcription Centers, Distribution and Marketing of mutual funds, Information Technology services, Job Work, processing of diamond and jewellery, etc have cropped up time and again.
The Ministry has intervene on couple of occasions to clarify issues relating to taxability under Business Auxiliary services. Once such issue is related to commissions paid to the Managing Directors or Board of Directors by the Companies. The Department issued notices to many companies and their Managing Directors demanding Service Tax on a pretext that Service Tax is applicable on the commission paid to the Managing Directors / Directors (whether whole time or independent). The Department also issued notices to certain companies and their independent Directors demanding Service Tax under Management Consultant Services. Ultimately, the issue once again traveled to the Ministry for clarification in the said matter. The Ministry examined the issue in detail and issued clarifications. As per the Circular dated 31.07.2009, Ministry observed that 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. If put in a layman language, the meaning and scope of the word “Commission” has to be read in context with the taxable service defined under the category of Business Auxiliary Services. Just picking up a word “Commission” and demanding Service Tax on the same is not the intention of the legislation. Business Auxiliary services mainly focuses on services in relation to Promotion or marketing or sale of goods produced or provided by or belonging to the client; or Promotion or marketing of service provided by the client. Further as per the definition, ”commission agent” means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person. Extrapolating the word “Commission” so that it fits to the taxable service category is nothing but abuse of the same.
The Ministry further observed that 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 are envisaged from a consultant are 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, there was a word of caution by the Ministry wherein, 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.