CESTAT Delhi: Rent Paid to Directors in Personal Capacity Exempt from Service Tax Under RCM

 

Introduction

Navigating service tax under the Reverse Charge Mechanism (RCM) can be tricky—especially when it involves rent paid to company directors. Recently, in PSV Polymers Pvt Ltd vs. Commissioner of Central GST & Central Excise, the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Delhi clarified that rent paid to directors in their individual capacity is not taxable under RCM. This landmark ruling has significant implications for businesses across India, offering clarity and potential tax savings.

Table of Contents

1. What Is Reverse Charge Mechanism (RCM)?

2. Background: The PSV Polymers Ruling

3. Why Rent to Directors Is Treated Differently

4. Key Takeaways from CESTAT Delhi

5. Practical Tips for Businesses

6. Quick Summary Table

7. Conclusion

8. FAQs

1. What Is Reverse Charge Mechanism (RCM)?

Under Section 68(2) of the Finance Act, 1994, certain services are subject to RCM—meaning the service receiver, not the provider, must pay service tax. Notification 30/2012‑ST lists “services provided by a director of a company to the company” under RCM .

Key point: The liability shifts only when services are provided by a director in their capacity as a director.

2. Background: The PSV Polymers Ruling

🏢 Case Summary

• Parties: PSV Polymers Pvt Ltd vs. Commissioner, CGST & Central Excise (CESTAT Delhi)

• Issues:

  1. Commission paid to foreign agents

  2. Rent paid by PSV Polymers to its directors for godowns

• Decision Date: June 27, 2025

✅ Tribunal’s Finding

CESTAT Delhi held that rent paid to directors for property they owned personally, used as godowns, was not taxable under RCM—because services were not rendered in their capacity as directors

3. Why Rent to Directors Is Treated Differently

Understanding “Capacity”

• Individual capacity: Director acting as owner/landlord

• Official capacity: Director acting as representative or on behalf of the company

In PSV Polymers and similar cases (e.g., Cords Cable Industries Ltd), the rent was paid to the directors as private owners, not as company representatives 

Legal Precedents

• Cords Cable Industries Ltd (CESTAT Delhi, April 2023): Reinforced that such rent is not RCM-taxable 

• Mec Shot Blasting Equipment Ltd (July 2022): Confirmed that residential rent to director is exempt unless used commercially 

4. Key Takeaways from CESTAT Delhi

• RCM applies only when a director provides services in official capacity.

• Rent paid to a director as a landlord is tax-exempt under RCM.

• Residential usage often leads to valid exemption.

• Historical rulings (2022–2025) bolster tribunal's consistency 

5. Practical Tips for Businesses

1. Document Clearly

   • Maintain rental agreements in founders’ personal names.

   • Clearly state usage—residential or commercial.

2. Generate Separate Invoices

   • Rent invoice = personal capacity

   • Director services (meetings, advisory) = directorial capacity

3. Pay Service Tax Only When Applicable

   • Avoid blanket RCM application; evaluate case-by-case.

4. Keep Supporting Evidence

   • Proof of residential usage, ownership documents, bank trails.

5. Consult Your Tax Advisor

   • An expert can help navigate evolving rulings and notices.

6. Quick Summary Table

Scenario	RCM Taxable?	Reason
Rent to director as landlord (personal capacity)	❌ No	Provided as owner, not director; clarified by CESTAT Delhi
Director supplying ‘director services’ (e.g., board duties)	✅ Yes	Provided in official capacity; covered under Notification 30/2012‑ST
Rent for residential premises	❌ No	Confirmed exemption, e.g., Mec Shot Blasting case

7. Conclusion

The PSV Polymers judgment reaffirms that rent paid to directors in their personal capacity is exempt from service tax under RCM. By distinguishing between personal and directorial roles, CESTAT Delhi provides valuable clarity. For companies, the takeaway is to structure rent payments carefully, maintain documentation, and only apply RCM where legally required.

8. FAQs

Q1. What is Reverse Charge Mechanism (RCM)?
RCM shifts the tax liability from service providers to receivers for specified services taxguru.in.

Q2. Is rent paid to a director always exempt?
If paid in personal capacity (as landlord), yes—provided documentation supports it.

Q3. What if the rent is for commercial use?
Even commercial rent is exempt if the owner is not acting as director. Cases like Mec Shot reinforce this.

Q4. Do director services (meetings, advisory fees) carry RCM?
Yes—services provided as a director are taxable under RCM per Notification 30/2012‑ST.

Q5. How to maintain compliance?
Use individual rental agreements, segregate invoices, and document use to clearly differentiate capacities.

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