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TMI Blog2024 (6) TMI 1331X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... vice between the Vice- Chairman & Managing Director, who is also Co-Promoter and along with his father having majority shareholding in the Appellant Company. Therefore, it could not be said that there was an employer-employee relationship. The Adjudicating Authority has gone through the documents submitted by the Appellants and after carefully evaluating those documents as also certain information available in public domain, he came to the conclusion that Mr. Jayadev Galla cannot be treated as whole time employee of the Appellant and therefore, the remuneration paid to Mr. Jayadev Galla is liable to Service Tax. 5. Learned Counsel for the Appellants has mainly relied upon the fact that Mr. Jayadev Galla has been reappointed as Vice-Chairman cum Managing Director w.e.f. 01.09.2015 by the Shareholders present at the AGM on the terms and conditions including remuneration, as recommended by the Nomination & Remuneration Committee. He further submits that thereafter Mr. Jayadev Galla had entered into an agreement with the Company, whereby it was agreed and decided, inter alia, by Mr. Jayadev Galla to undertake to serve the company as Vice Chairman and Managing Director of the Company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing due process as per Articles of Association (AoA) and only after due approval and subsequent contract between him and the company, he worked as Vice Chairman and Managing Director. Therefore, as Vice Chairman/Managing Director, he is an employee of the Appellant and therefore, any remuneration paid to him including commission is not liable to service tax by virtue of its exclusion from the definition of service. Learned Counsel also relies on Circular No. 140/10/2020-GST dt.10.06.2020 issued by CBIC to clarify certain issues in respect of GST on director's remuneration. He has cited Para 5.1, 5.2 & 5.3 in support of his case, reproduced below for ease of reference: "5.1 Once, it has been ascertained whether a director, irrespective of name and designation, is an employee, it would be pertinent to examine whether all the activities performed by the director are in the course of employer-employee relation (i.e. a "contract of service") or is there any element of "contract for service". The issue has been deliberated by various courts and it has been held that a director who has also taken an employment in the company may be functioning in dual capacities, namely, one as a dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an essential ingredient without which it cannot be construed whether the individual is the Promoter/Director or an employee Director. Since in this case Mr. Jayadev Galla being the largest shareholder of the company along with his father, he cannot be removed from service and therefore, there is no employer-employee relationship. 9. Heard both sides and perused the documents. 10. The core issue, which is to be decided in this case, is whether Mr. Jayadev Galla is an employee of the Appellant or whether he is providing services to the Appellant. The Original Authority has dealt in detail on the reliance placed by the Department to come to the conclusion that Mr. Jayadev Galla, in the given facts of the case, cannot be an employee of the Appellant. He has mainly relied upon certain provisions under the Companies Act as well as relevant Articles in AoA of the Appellant, according to which the Managing Director is required to be nominated by the Galla family. He came to the conclusion that AoA have restricted the powers of the Board of Directors by making it compulsory to accept/appoint the person nominated as Managing Director by Galla family. He has also observed that the initial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a stipulation that Mr. Jayadev Galla shall devote the whole of his time and attention to the conduct, management and superintendence of the business of the company and shall exercise such of the powers of the management and duties as are entrusted to and conferred upon him from time to time and since during the relevant period, Mr. Jayadev Galla was also Hon'ble Member of Parliament and was attending various parliamentary duties, he could not have given his whole time for working as Managing Director of the Appellant and therefore, he is not a whole time director/ Managing Director. 13. We find that the conclusions drawn on the basis of wordings of the AoA as also from the fact Mr. Jayadev Galla being a Co-Promoter and therefore, having control over Board is not based on correct interpretation of the facts and the law governing the appointment and role of Managing Director under the Companies Act, 2013 and Rules made thereunder, as also the laws governing chargeability of the Service Tax or exemption thereof for such role. It is obvious that under Finance Act, levy of Service Tax is only on the services provided by Directors and not on the services provided by an employee to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h as he may be both, a Director as well as an employee. Therefore, Managing Director, merely because there is restrictive clause or flawed selection process, cannot be termed as non-employee as long as he is designated as Managing Director and he is actually performing certain functions as assigned to him by the Board. It has not been alleged by the Department that he has not been performing any managerial functions in his capacity as Managing Director. It is to be noted that a mere director or an independent director, who is not an employee, cannot take administrative or managerial decisions in the company, whereas the Managing Director is not only a Director on the Board but he is also managing affairs of the company in his capacity as Managing Director of the company and in that sense, he is serving the company. 15. At this juncture, it is important to examine the roles and functions of Managing Director as stipulated under the Companies Act, 2013 (herein after referred to as the Act). Section 2(54) of the Act defines the term "Managing Director" is reproduced below: "(54) "managing director" means a director who, by virtue of the articles of a company or an agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is also observed that for the violation of any of the provisions of the Act, there is penal provision in the Act itself and there is nothing on record to suggest that any of the provisions concerning appointment of working as Managing Director have been found in violation of the provisions under the Act for which any penal proceedings have been initiated under the Act or either Mr. Jayadev Galla or the Appellants have been penalized for any such violation. 17. There is also emphasis on the fact that Mr. Jayadev Galla also happens to be the promoter of the company. As per Section 69 of the Act, a promoter is a person as defined in terms of the said section. In the facts of the case, Mr. Jayadev Galla is undisputedly a promoter, in as much as he has control over the affairs of the company directly or indirectly as a majority shareholder. However, the issue is whether merely being a promoter would debar him from becoming Managing Director or otherwise. The appointment of the Managing Director is regulated by the provisions under the Act and it has not been disputed that he has been legitimately appointed as Managing Director by the Board of the Appellants. Two aspects need to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Bench in Brahm Alloys Ltd (cited supra) only stipulates that to establish employer-employee relationship, the clause of hiring and firing are essential ingredient without which it cannot be construed whether the individual is promoter director or an employee director. In this case, the facts on record show that there were provisions for hiring as well as terminating the agreement in the event of non-fulfillment of obligations/duties entrusted to Managing Director. It has not been alleged in the SCN that none of these activities were performed by Mr. Jayadev Galla. Similarly, it would be a mere presumption that since he is a promoter having majority shareholding along with his father, the Board would never have terminated his services. This presumption is not backed by any cogent ground except for the clause, which provides for nomination of the Managing Director by the Galla family. 20. We find that Hon'ble Supreme Court in the case of Ram Prasad Vs CIT (cited supra) has dealt with the entire issue of whether a managing director can be an employee or otherwise and has placed great reliance on the terms of AoA of the company for arriving at the conclusion whether a managing dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se that the Appellant has been deducting the TDS as salary and not as consultation fee, etc. Further, the Income Tax department, if they had any doubt, could have assessed the same as business income chargeable to different rate and exemptions, etc. They have admittedly not disputed the deduction of TDS by treating the said remuneration/commission, etc., as salary. 23. We also find that the Original Authority has gone beyond the realm of SCN, in as much as he has examined Mr. Jayadev Galla's role as Hon'ble Member of Parliament to support his case that he could not have been a whole time director. Firstly, since this ground was not mentioned in the SCN, this could not have been sprung on the Appellants at the stage of OIO without giving them adequate opportunity to rebut the same and therefore, this should not be a ground for deciding that Mr. Jayadev Galla is not a whole time director. Secondly, as cited by the learned Counsel, the Hon'ble Supreme Court has held that there is no bar on Hon'ble Member of Parliament to be a Managing Director or on the Board of any company. Apart from this, irrespective of whether Managing Director or Director is a whole time or part time, it does n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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