EMPLOYEE'S SERVICES ARE NOT TAXABLE

[Dr. Sanjiv Agarwal]

New definition of service w.e.f. 1-7-2012

In the erstwhile system, only the services specified in clause (105) of section 65 of the Finance Act, 1994 were taxed under the charging section 66. In the new system, all services, other than services specified in the negative list, provided or agreed to be provided in the taxable territory by a person to another would be taxed under section 66B. 'Service’ has been defined in clause (44) of the new section 65B and means –

• any activity
• for consideration
• carried out by a person for another
• and includes a declared service.

The said definition further provides that ‘Service’ does not include –

• any activity that constitutes only a transfer in title of (i) goods or (ii) immovable property by way of sale, gift or in any other manner
• a transaction only in (i) money or (ii) actionable claim
• any service provided by an employee to an employer in the course of the employment.
• fees payable to a court or a tribunal set up under a law for the time being in force
• a transfer, delivery or supply of goods which is a deemed sale under article (29A) of the Constitution.
• duties performed by MP/MLA/Members of Municipal Corporation, Panchayats or local authorities or person holding constitutional posts.

Employee's Services

The exclusion from the scope of service in case of employment is qualified by the words, 'in the course of employment'. It implies activities or services in regular or ordinary course of employment, i.e., during normal or ordinary employment wherein employees work under the guidance, direction and superintendence of his or her employer so as to achieve the objectives of employer. There shall be no Service Tax liability on services of employees for the services provided to employer.

Employer – Employee Relationship

How to ascertain that employer – employee relationship exists depends upon circumstances and different tests as it is a subjective assessment depending upon facts and circumstances of each case.

For ascertaining whether an employer-employee relationship exists, the assessee working for a company and receiving remuneration for such work or services ought to show that :

1. there was relationship of master and servant or employer and employee between the company and herself or himself,
2. such relationship involved the element supervision and control by the employer, that it the company,
3. the duties or functions discharged by such a person show that she or he was working as a salaried person and was doing regular work allotted to her or him by the company,
4. the remuneration received by him or her was in the form of salary.

Control test is one of the tests which may decide the existence of employment. Integration test is another test in which it has to be examined whether the employee is fully integrated into employers concerns and objective. Reporting, controlling, payment of salary, nature of job, appointing authority, administrative decisions, etc also decide the employer-employee relationship. Factors such as working in the premises of the employer, working on the equipments provided by the employer and power to remove if the work is not in conformity with the instructions are also relevant for determining the relationship.

In case a person holds the office in an organization and receives remuneration by virtue of that office, it does not necessarily bring about a relationship of an employer and an employee or a master and a servant between her or him and the person who paid her or him the remuneration. The question with regard to an employer­ employee relationship is necessarily a question of fact and that depends on the nature and characteristic of the appointment or terms and conditions  of the agreement between an employer and an employee.

The nature of an assessee's employment may be determined by the Articles of Association of a company and the agreement, if any, under which a contractual relationship between the director and the company has been brought about, where under the director is constituted as an employee of the company. The control which the company exercises over the assessee need not necessarily be one which tells him what to do from day to day. That would be too narrow a view of the test to determine the character of the employment. Nor does supervision imply that it should be a continuous exercise of the power to oversee or supervise the work to be done.

Every person working for a company may not be employee in every case. For example, independent directors, auditors, consultants, retainership arrangements etc. do not constitute employment. While contractual employment is also an employment, the contract wherein both   parties work on a principal to principal basis does not result in employment. It can also be seen as to the person concerned is filing his tax returns under the head salary' or business and professional income.

In case of directors, every director can not be considered as an employee. The relationship would depend upon the nature of employment, contract and terms of employment and provision of articles of association. The answer to the question whether remuneration received by a director is taxable under the head "Income from salaries" or not depends upon the answer to the question as to whether the director is an employee of the company or not. For deciding the question whether a director is an employee of the company or not, one has to find out as to whether the relationship of master and  servant exists between the company and the director  or not. This question is covered by the decision in CIT vs. Gautam Sarabhai 1984 (7) TMI 354 - GUJARAT HIGH COURT .

Once an employee-employer relationship is established between a director and a company, the remuneration paid in any manner wouldn't change the nature of the service. Thus, in case of the executive directors who are in full-time employment of the company, the remuneration paid in any form is not liable to service tax and, in case there is no such employee – employer relationship, the gross amount paid in the form of commission, bonus, share in profits, ESOPs etc., would be liable to service tax.