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TMI Blog2019 (1) TMI 433X X X X Extracts X X X X X X X X Extracts X X X X ..... of their records, it was noticed that the appellant had been receiving services from the directors, but failed to discharge service tax under reverse charge mechanism, on the remuneration paid, in accordance with Notification number 30/2012-ST dated 20.06.2012 and Notification number 45/2012 dated 07.8.2012. Consequently, demand notice was issued to the appellant for recovery of service tax of Rs.12,48,67,525/- against the total amount of remuneration of Rs. 101,02,55,057/-paid to the directors during the period from July 2012 to March 2015. On adjudication, the demand was confirmed with interest and equal amount of penalty. Hence, the present appeal. 2.1. Learned advocate for the appellant Shri Rohan Shah has submitted that the Ld. Commissioner in the impugned order confirmed the demand on the misconception that director of a company, since involved in the management of the affairs of the company, also being 'malik' of the Company, can never be an employee of the company. He submits that there is no bar under the earlier or present Companies Act,2013 for an employee to be director of the company. It is his contention that the Act recognizes that a director can be in whole time em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an employee, also discharge the functions entrusted upon him by the board of directors and would work under their supervision and control. Whereas, while discharging the functions as a director on the Board of Directors, the employee-director would be a constituent member of the board of directors but the board of directors would exercise supervision and control over the functioning of such employee-director with regard to his duties and functions assigned to him as an employee. 2.3. Referring to other statutes namely income tax act, 1961, employees Provident Fund and Miscellaneous provisions Act, 1952 and Unlisted Companies Issue of Sweat Equity Shares Rules, 2003, the learned advocate has submitted that under the Income Tax act, section 192 provides that any person responsible for payment of salary should deduct income tax on the amount of salary payable; in the present case the appellant have deducted income tax from the salary payable to the directors and issued Form No. 16 for the same. In support of his contention, the learned advocate placed copies of TDS certificate issued by the appellant to the respective directors. Further, the directors while filing their income ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic role to be performed. The remuneration of the said employee-directors was also decided and controlled by the company. The manner and the method to be adopted by the employee-directors for discharging their functions were subject to supervision and guidance of by the board of directors. The company also had complete discretion and freedom to terminate the services of any of the employees and it could divest any of the directors of the employee functions after which it would only remain as director in the board and ceases to become whole time directors/employee. None of the employees or employee-director could claim any kind of protection or privileges qua the company, if their services as employees were terminated. The learned advocate has submitted that the Hon'ble Supreme Court of India analysing the relationship of an employer and employee laid down the same tests with respect to the directors of the company in the case of Ram Prasad Vs. the Commissioner of Income Tax - (1972) 40 Comp Case 544(SC) and Employees State Insurance Corporation Vs. Apex Engineering Private Limited (1998) 1 SCC86. 2.5. Assailing the impugned order the learned advocate for the appellant has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he whole time directors after 01.7. 2012 is a question of law and subject to interpretation, therefore, allegation of suppression cannot be sustained. 3. Per contra, the learned A.R. for the Revenue has submitted that the words, 'employer', 'employee' and 'salary' have not been defined under the Finance Act, 1994, Income Tax Act, 1961 nor under the Companies Act, 1956. In Section 17 of Income Tax Act only what salary includes has been specified. Further, the provisions of Companies Act, 1956 is not dealing with employeremployee relationship. In case of Employees Provident Funds Act, 1952, 'employee' has been defined to mean any person who is employed for wages in any kind of work, manual or otherwise, in or in connection with the work of a factory and who gets his wages directly or indirectly from the employer, and includes any person employed by or through a contractor in or in connection with the work of the factory. In case of Employees Provident Funds and Miscellaneous Provisions Act, 1952, 'employee' has been defined mostly on similar lines, whereas 'employer' has been defined to include 'managing director'. 3.1 He has contended that the plea of the appellant that the Direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyee relationship. The ITAT in the said case has observed that by not allowing to work elsewhere does not mean that their relationship is that of master and servant. He has further submitted that the Director per se are entitled to remuneration as per the Companies Act, 1956 and the appellants had not submitted any evidence showing bifurcation of the amount received for working as Director and also as an employee. The claim of the appellant that there is no remuneration of Director is without substance. It is his contention that under the Negative List Service Tax regime, effective from July, 2012, services rendered by Director are liable to Service Tax, and whether the same service or work rendered arising out of terms of employment needs to be established. He has argued that Board's Circular 2009 is not relevant to the scenario after 2012 during negative list service tax regime, hence, not applicable. 4. Heard both sides and perused the records. 5. The short issue involved in the present appeal for determination is: whether remuneration paid to the Directors by the appellant is chargeable to Service Tax and the appellants are required to discharge Service Tax under reverse char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Articles of association and as per resolutions of the Board of Directors (BOD).Under various provisions of the companies act, these directors are treated as employees of the company, consequently all the conditions that are applicable to an employee of the company, even though, they participate in the management of the affairs of the company as part of Board of Directors, but also are employees of the Company. To appreciate the said argument it is necessary to read the definition of the Director, Managing Director, whole time Director under the Companies Act. . Sec.2(34) "Director" means a director appointed to the Board of a company. 2(54)"Managing Director" means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of the managing director, by whatever name called. 2(94)"whole-time Director" includes a Director in the wholetime employment of the company;" "Executive Director" means a whole time director as defined in clause (94) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e limited company engaged in the business of running hotels. By an agreement with the company, the assesse was to receive Rs.2000/- per month, fixed sum of Rs.500/- per month as car allowance, 10% of gross profit of the company. For assessment year 1956-57 for which the accounting year is the year ending 30.9.1955, the assesse was assessed in respect of Rs.53,913/- payable to him as 10% of the gross profit which he gave up soon after the accounts were finalized but before they were passed by the General meeting of the shareholders. The question before the Hon'ble Supreme Court was whether the 10% gross profit payable to the assessee under the terms of the agreement appointing him as the managing director is liable to be assessed as 'salary' or under the head 'income from business'. The contention of the assessee in that case was that in order to assess the income as salary it must be held that there was a relation of master and servant between the company and the assesse. It was pleaded that for such a relationship to exist, it must be shown that the employee must be subject to the supervision and control of the employer in respect of the work the employee has to do. Where, however ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for ascertainment remains the same." Analyzing the facts in issue and applying the said tests their Lordships further observed as: "14. A perusal of the articles and terms and conditions of the agreement definitely indicate that the assessee was appointed to manage the business of the company in terms of the articles of association and within the powers prescribed therein. Reference may particularly be made to Arts. 139 and 142 to ascertain the nature of the control imposed by the company upon the Managing Director. Under the former the additional work which he can do as an agent or manager of the company can be done on terms and conditions and on such remuneration as can be agreed upon between him and the Directors of the Company and under the latter he had to execute the decisions that may be arrived at by the Board from time to time. The very fact that apart from his being a Managing Director he is given the liberty to work for the company as an agent is indicative of his employment as a Managing Director not 'being that of an agent. Several of the clauses of Art. 140 as pointed out by the High Court specifically empower the Board of Directors to exercise control over th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors continue till the Board of Directors desired to do so. It is his contention that the officer of a company as per Sec.2(60) of the Companies Act, who defaults in compliance with the provisions of the Act is liable for punishment, which includes whole time Directors. Thus, the whole time Directors are amenable to criminal action like an officer of the company. 14. The Revenue, on the other hand, referring to the judgment of Hon'ble Allahabad High Court in the case of Sardar Harpreet Singh Vs. Commissioner of Income Tax - 1990 SCC Online All 929, submitted that merely on deduction of Income Tax at source cannot be considered that the Director and the Company has employer and employee relationship. It is the agreement between the employer i.e. company and the Director would reveal the exact relationship between them. In the present case, no such agreement exists between the employer and the Directors, hence there exists no employer-employee relationship . 15. We do not find merit in the argument of the Revenue in as much as during the course of investigation, the statement of Shri Atit Dalal, Vice President (Finance & Accounts) of the appellant company was recorded by the in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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