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2024 (6) TMI 1331 - AT - Service TaxLevy of service tax - remuneration to Vice-Chairman cum Managing Director (VCMD) - reverse charge mechanism - whether Mr. Jayadev Galla VCMD is an employee of the Appellant or whether he is providing services to the Appellant? - HELD THAT - Mr. Jayadev Galla who also happens to be a Co-Promoter and holding majority share along with his father in the company was duly appointed by the Board on the basis of recommendation of the Nomination Remuneration Committee after due approval in the AGM. The Appellants have deducted TDS under Section 192 of Income Tax Act considering the remuneration/commission paid to Mr. Jayadev Galla as salary. There is no dispute that Mr. Jayadev Galla has not at all discharged his duty and functions as Managing Director towards the Appellant company whether in part or full because of his being otherwise as a Member of Parliament. A holistic evaluation would lead to the conclusion that a Managing Director is a key managerial person as envisaged under Companies Act 2013 who is entrusted with certain functions and activities for running the company under the overall control of the Board and for which he is entitled to get certain remuneration as well as commission as provided under Companies Act 2013 and Rules made thereunder. A Managing Director as is defined under the Companies Act will be an employee of the company and he may have other roles like Co-Promoter Chairman Vice Chairman Director etc. on the Board of the same company or on the board of other companies as per the provisions of Companies Act but his role as Managing Director vis- -vis company will be that of an employee and employer and therefore any service provided by him in his capacity as Managing Director will not be covered by definition of service in terms of Section 65B(44) of Finance Act 1944 - In this case there is nothing on record that remunerations paid to him in his capacity as Managing Director included any amount paid or payable to him as Vice Chairman separately. The impugned order is set aside - appeal allowed.
Issues Involved
1. Whether the Vice-Chairman cum Managing Director (VCMD) is an employee of the Appellant. 2. Whether the remuneration paid to the VCMD is liable to Service Tax under the Reverse Charge Mechanism. Issue-wise Detailed Analysis 1. Whether the Vice-Chairman cum Managing Director (VCMD) is an employee of the Appellant: The Department alleged that the Appellant did not pay Service Tax on the remunerations paid to their VCMD, Mr. Jayadev Galla, under the Reverse Charge Mechanism. The core issue was whether Mr. Galla was an employee of the Appellant or if he was providing services to the Appellant. The Original Authority concluded that there was no contract of service between Mr. Galla and the Appellant, and therefore, an employer-employee relationship could not be established. Consequently, the remuneration paid to Mr. Galla was deemed taxable under Service Tax. The Appellant argued that Mr. Galla was reappointed as VCMD by the shareholders at the AGM and entered into an agreement with the company to serve in this capacity. They relied on various circulars and case laws, including the Supreme Court ruling in Ram Prasad Vs CIT, which held that a Managing Director could be considered an employee if remunerations were treated as salary under the Income Tax provisions. The Tribunal found that the conclusions drawn by the Original Authority were not based on a correct interpretation of facts and law. It was noted that the appointment of Mr. Galla as VCMD was in accordance with the law, and the restrictive nomination clause in the Articles of Association (AoA) did not invalidate his appointment. The Tribunal emphasized that the role of a Managing Director, as defined under the Companies Act, 2013, includes substantial powers of management, making him a "key managerial person" and thus an employee of the company. 2. Whether the remuneration paid to the VCMD is liable to Service Tax under the Reverse Charge Mechanism: The Department argued that the services provided by Mr. Galla were taxable because he was not an employee. They relied on the AoA and the fact that Mr. Galla was also a Member of Parliament, suggesting he could not devote full time to the company's affairs. The Appellant countered that the remuneration paid to Mr. Galla was subject to TDS under Section 192 of the Income Tax Act, indicating it was treated as salary. They cited various circulars and judgments to support their claim that the remuneration paid to a Managing Director, who is an employee, is not liable to Service Tax. The Tribunal agreed with the Appellant, noting that the remuneration paid to Mr. Galla was treated as salary for Income Tax purposes and was subject to TDS under Section 192. The Tribunal also highlighted that the role of a Managing Director involves substantial management responsibilities, which are indicative of an employer-employee relationship. Therefore, the remuneration paid to Mr. Galla could not be subjected to Service Tax. Conclusion The Tribunal allowed the appeal, setting aside the impugned order and granting consequential benefits to the Appellant. The Tribunal concluded that Mr. Jayadev Galla, as the Managing Director, was an employee of the Appellant, and any remuneration paid to him in this capacity was not liable to Service Tax under Section 65B(44) of the Finance Act, 1994. The decision was pronounced in the Open Court on 28.06.2024.
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