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Commissions paid to directors not taxable
06 January, 2010 Ahmedabad :
Commissions paid to directors not taxable

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 category 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 category where an activity can be classified, the same is made taxable under the Business Auxiliary services under Section 65 (19). 

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In recent past, many ambiguities with respect to call centres, medical transcription centres, distribution and marketing of mutual funds, information technology services, job work, processing of diamond and jewellery etc, have cropped up time and again. 
 
The finance ministry has intervened on a couple of occasions to clarify issues relating to taxability under Business Auxiliary services. Once such issue is related to commissions paid to managing directors or directors by the companies. 
 
The department issued notices to many companies and their managing directors demanding Service tax on the pretext that the same is applicable to the commission paid to 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 travelled to the ministry for clarification. The ministry examined the issue in detail and issued clarifications. As per the circular dated 31.07.2009, the 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 its 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 applicable on such amount.
Put in a layman's 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.
 
Further, as per 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 acting on behalf of another person. Extrapolating the word 'commission' so that it fits the taxable service category is unwarranted. 
 
The ministry further observed that managing directors/directors (whole-time or independent), being part of board of directors, perform management function. They do not perform consultancy or advisory function.
 
The definition of management consultant service makes it clear that what is expected from a consultant is advisory service, and not 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, as commission for their performance would not be liable to Service tax.
 
Taxable Services: Business Auxiliary Services

 

Courtesy: From the desk of Monish Bhalla, Founder, www.servicetaxonline.com
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