Director rented to his own company. The reverse charge didn't apply.

When a Director is Just a Landlord: CESTAT Clears the Air on Reverse Charge for Rent

M/s Cords Cable Industries Limited manufactures cables in Jaipur. Two of its directors, Naveen Sawhney and D.K. Prashar, owned certain premises in their personal names. They rented these premises to the company for use as its Registered Office. Between July 2012 and August 2014, the company paid rent of approximately Rs. 2.73 crores. The landlords, as individual property owners, charged service tax of Rs. 27.14 lakhs on this rent and deposited it with the exchequer. The tax department, however, saw a different transaction. It issued a show cause notice claiming the company itself should have paid service tax of Rs. 33.74 lakhs under the reverse charge mechanism—because the landlords were also directors. The stakes were clear: a demand of over Rs. 33 lakhs, plus interest and penalty, hinged on whether renting property as an individual owner is the same as providing a service as a director.

The Two Roles, One Person

The dispute began when the Deputy Commissioner, Central Excise, Jaipur issued a show cause notice on January 28, 2016. The notice invoked the extended period of limitation and proposed a demand of Rs. 33,74,509/- under the reverse charge mechanism. The department's logic was straightforward: Notification No. 30/2012-ST dated June 20, 2012, as amended by Notification No. 45/2012-ST dated August 7, 2012, requires the recipient of a service to pay service tax under reverse charge when the service is "provided or agreed to be provided by a director of a company to the said company." Since Naveen Sawhney and D.K. Prashar were directors of M/s Cords Cable Industries Limited, the department argued that the rent they received for the corporate office was a service provided by directors to the company.

The company contested this. It argued that the two individuals rented out the property as owners of the premises, not in their capacity as directors. The service of renting immovable property was provided in their individual capacity. The fact that they also happened to be directors was incidental. The company pointed out that service tax had already been paid by the landlords on the rent received. Demanding the same tax again from the company under reverse charge would amount to double taxation.

What the Lower Authorities Decided

The Deputy Commissioner, Central Excise, did not accept this argument. On March 15, 2017, he confirmed the demand of Rs. 33,74,509/- along with interest and penalty. The company appealed to the Commissioner (Appeals), Jaipur. On May 7, 2018, the Commissioner (Appeals) partially allowed the appeal—he set aside the penalty but upheld the demand and interest. The company then approached the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, in Service Tax Appeal No. 52207 of 2018.

The Critical Notification and Rule

The core of the dispute lay in the language of two provisions. Clause (A)(iva) of Paragraph I of Notification No. 30/2012-ST (as amended) covers services "provided or agreed to be provided by a director of a company to the said company." Serial No. 5A of the Table at Paragraph II of the same notification specifies that for such services, the recipient (the company) is liable to pay service tax under reverse charge. Rule 2(1)(d)(EE) of the Service Tax Rules, 1994 defines the person liable to pay service tax as "in relation to service provided or agreed to be provided by a director of a company or the body corporate to the said company or body corporate, the recipient of such service."

The key phrase in both provisions was the same: "provided by a director of a company to the said company." The question was whether renting immovable property by an individual who is also a director falls within this phrase.

The Argument Before CESTAT

Before the Principal Bench of CESTAT, New Delhi, comprising Justice Dilip Gupta (Author) and Mr. P.V. Subba Rao (Concurring), the company's counsel argued that the service of renting immovable property was provided by Naveen Sawhney and D.K. Prashar in their individual capacity as owners of the premises. They were not acting as directors when they entered into the rental agreement. The company relied on the fact that the rental income was their personal income, not director's remuneration. The service tax on this rent had already been paid by them as individual service providers. The reverse charge mechanism, the company argued, was meant for services that a director provides in his capacity as a director—such as sitting fees, commission, or professional services rendered as part of directorial duties. Renting out personal property is not one of them.

The department, on the other hand, took a literal approach. It argued that the notification does not distinguish between services provided by a director in his personal capacity and those provided in his official capacity. The only requirement is that the service provider is a director of the company and the recipient is the same company. Since both conditions were satisfied, the reverse charge mechanism applied.

The Tribunal's Reasoning

The CESTAT rejected the department's literal interpretation. The Bench observed that the phrase "provided by a director of a company to the said company" must be read in context. The notification and the rules are designed to cover services that a director provides to the company in his capacity as a director. The capacity in which the service is provided is the decisive factor. When an individual rents out his personal property, he does so as an owner, not as a director. The fact that he also holds a directorship in the company does not transform his personal property into a directorial service.

The Tribunal noted that the service tax on the rent had already been deposited by the landlords. This meant there was no revenue loss to the exchequer. While this observation was not strictly necessary for the decision—it was obiter—it reinforced the conclusion that demanding the same tax again from the company would be inequitable.

The Bench held that the reverse charge mechanism under Notification No. 30/2012-ST (as amended) and Rule 2(1)(d)(EE) of the Service Tax Rules, 1994 is not attracted when individuals who happen to be directors of a company provide the service of renting immovable property in their individual capacity as owners of the premises. The service is not "provided by a director of a company to the said company" within the meaning of these provisions.

THE TEST: Ask one question: did the director provide the service in his capacity as a director, or in his individual capacity as a property owner, professional, or independent contractor? Only the former attracts reverse charge.

What This Means for Practitioners

This judgment provides a clear framework for distinguishing between services provided by a director in his official capacity and those provided in his personal capacity. For advocates advising companies on service tax compliance, the key takeaway is that the reverse charge mechanism for director services is not triggered merely because the service provider holds a directorship. The nature of the service and the capacity in which it is provided must be examined. If a director rents out his personal property, sells his personal assets, or provides professional services as an independent consultant, the reverse charge provisions do not apply. The service tax, if any, must be paid by the director as an individual service provider.

For CFOs and founders, this judgment offers a practical safeguard. If your company pays rent to a director who owns the premises in his personal name, you do not need to pay service tax under reverse charge. The director, as the individual service provider, is liable to pay service tax on the rent. Ensure that the rental agreement clearly identifies the landlord as the owner of the property, not as a director of the company. Maintain records showing that the rental income is the personal income of the director, not director's remuneration. This documentation will be crucial if the tax department ever questions the arrangement.

The judgment also has implications for the invocation of the extended period of limitation. The Tribunal noted that service tax had already been deposited, implying no revenue loss. In cases where the department invokes the extended period on the ground that the company suppressed the fact that the landlord was a director, this judgment can be used to argue that there was no intent to evade tax, since the tax was already paid by the landlord.

The Bottom Line

When a director rents out his personal property to his company, he acts as a landlord, not as a director—and the reverse charge mechanism does not apply.