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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 ..... dt.07.08.2012. Thereafter, based on various documents submitted by the Appellants as well as the statements recorded, they came to the conclusion that Appellants have not paid Service Tax on all the amounts paid to Mr. Jayadev Galla, Vice-Chairman and Managing Director who also happened to be the Co-Promoter of the Company along with his father. 3. The Department's case is that on the conjoint reading of the provision of the Act in terms of Section 65B(44) of the Finance Act, as also S.No.5A of the Notification No.30/2012-ST dt.20.06.2012, the services provided by Directors, who are not employees of the company/ body corporate, is liable to be charged to Service Tax. On going through the contracts and other documents as well as the nature of payments made to different Directors, including Mr. Jayadev Galla, they came to the conclusion that there is no contract of service between the Vice-Chairman & Managing Director and the Appellants and therefore, in the absence of any contract of employment or service, the employer-employee relationship could not be established and therefore, Mr. Jayadev Galla cannot be treated as employee and therefore, the services provided by him are taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the AGM and he reports to the Board. Apart from certain case laws in support of their claim that Mr. Jayadev Galla was an employee of the company, they have relied on the rulings of Hon'ble Supreme Court in the case of Ram Prasad Vs CIT [1972 (86) ITR 122], wherein the Hon'ble Supreme Court held that the remuneration payable to the person in question was salary and was chargeable to tax under the Income Tax provisions. Therefore, the Managing Director was held to be an employee and not an agent of the company. 7. Learned Counsel also relies on Circular No.24/2012 dt.09.08.2012, wherein the Government of India has specifically stated that service tax on commission payable to non-whole time directors of a company alone would be taxable and therefore, commission payable as part of remuneration to the whole time directors such as the Managing Directors would not be liable to service tax. They have also quoted a newspaper extract of 'The Hindu' published on 02.01.2021 in support of their claim that there is no law against appointment of a Member of Parliament as Chairman/Vice Chairman/ Managing Director of a private/public limited company. Learned Counsel has specifically relied h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017." 8. On the other hand, learned AR has mainly relied on some of the provisions contained in the Articles of Association (AoA) and specially Article 140(e)(i), which enjoins the Board of Directors to appoint the Managing Director of the Company from within the Board of Directors and the Managing Director shall be nominated by the Galla family. According to learned AR, this provision completely restricts the power of Board of Directors by making it compulsory to accept/appoint the person nominated as Managing Director by Galla family and therefore, Mr. Jayadev Galla cannot be treated as an employee and the Appellants cannot be treated as an employer. He further reiterates that as elaborately discussed in the OIO, "whole time Director" includes a Director in the whole time employment of the company, whereas Mr. Jayadev Galla has been a Member of Parliament during the period 2014-19 & 2019-24 and therefore, he could not have devoted full time to the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, the said circular has no relevance. He also examined various judgments cited by the Appellants in support that when the Income Tax Department has accepted the payment of remuneration/commission as salary, then the concerned person has to be treated as an employee and not otherwise. Essentially, according to the Adjudicating Authority, the provisions of Income Tax Act would not prevail over the Service Tax provisions, when there is a conflict and in fact, he held that as a matter of fact, Income Tax Act will not have an objection so long as their interest is protected, whereas, Service Tax Department has to examine the issue in terms of provisions of statute governing the Service Tax Act and Rules made thereunder. The Original Authority has also distinguished the observation of the Hon'ble Supreme Court in the case of Ram Prasad Vs CIT (cited supra) on the grounds that the said judgment would be relevant where the process of selection of Managing Director is done in the normal course of business, whereas in this case, the Managing Director has been appointed through AoA and not by the Board of Directors. He has however agreed in Para 23.2 of impugned order that appoin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich says that based on the nomination made by the Nomination & Remuneration Committee and on the basis of the approval of AGM, the Managing Director cum Vice Chairman has been appointed, who has subsequently entered into an agreement with the Appellants, meaning thereby, he has accepted the said appointment on the stipulated terms and conditions of appointment. He, as Vice Chairman and Managing Director is answerable to Board. Therefore, merely because there is restrictive clause for nomination, it does not mean that the said nomination would result into appointment being invalid as long as it is consisted with laws and rules governing appointment of Managing Director and this has not been disputed. 14. Essentially, mode of appointment can be different depending on the provisions under the Act as well as in the AoA of the Company and the designation of the head of the Board can also be different, viz., CEO, whole time Director, Managing Director, Manager, etc., but the fact remains that all these people are being considered as "key managerial persons" under the Companies Act. Therefore, once somebody has been appointed, following due process as a Managing Director, which incidenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to suggest that this appointment is in contravention of any of the provisions of Section 196 of the Act. There is no provision to disqualify the appointment of any person as Managing Director, who is also otherwise a promoter of the company under Section 196 of the Act. Similarly, Section 197 of the Act provides for managerial remuneration payable by a public company to its directors including Managing Director and there is nothing on record to suggest that the remuneration paid to Mr. Jayadev Galla is in violation of provisions of Section 197. There is nothing on record to suggest that the salary and commission paid were not in accordance with the provisions of the Act. Section 165 of the Act also places restriction on number of public companies in which a person can be appointed as director. This shows that a Managing Director/director of a company can also be appointed as director on the Boards of other companies and it is to be noted that the Managing Director is also a director on the Board of the company, where he has also been appointed as Managing Director. Therefore, in his capacity as director, he is eligible to become a director on the Boards of other companies and to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is contract/agreement is in the nature of an employment agreement and therefore, it is not correct to say that Board had no power to regulate or terminate the services of Mr. Jayadev Galla. It is a cardinal law under the Companies Act that the company and its director, promoter, etc., are two separate legal entities and therefore, merely because the latter has a controlling interest in the company, it would not make him "company", per se, in as much as he would get himself self appointed and if that being so, it would mean that he would be self serving. This is legally not tenable. 19. Further, in Para 21.1 of AoA, there is a clear cut description of the businesses to be carried on by the Managing Director or whole time Director. The perusal of functions entrusted to the Managing Director would show that Managing Director of the Appellant is required to perform various functions relating to the management of affairs of the company. It is not disputed that his appointment as Managing Director is not in accordance with law. Therefore, having been appointed in accordance with the law, there is a clear cut role and functions defined for the Managing Director in the AoA of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sentially clarified that a director may have dual capacities, viz., one as a director of the company as well as on the basis of contractual relationship of master and servant with the company, i.e., under a contract of service (employment) entered into with the company. Reliance has also been placed on the fact that if the TDS is deducted under Section 192 of the Income Tax Act, then it is in the nature of salary paid to the director and therefore, if the director's remuneration is declared as salary in the books of accounts of the company and subjected to TDS under Section 192 of Income Tax Act, then the same is not liable to be taxed to GST as this would be in the nature of service by employee to the employer. Therefore, on this count also Mr. Jayadev Galla as Vice Chairman cum Managing Director is an employee of the company and therefore, remuneration/commission paid to him cannot be subjected to Service Tax. 22. Further, the case laws, relied upon by the Appellants before the Adjudicating Authority and not considered relevant by him, are quite relevant to the facts of the case, in as much as Income Tax Department has not raised any objection on the TDS deduction in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an agent of the company. 24. To sum up, 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. Therefore, 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. 25. Therefore, a Managing Director, as is defined under the Companies Act, will be an employee of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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