The Customs, Excise & Service Tax Appellate Tribunal has clarified a long-standing ambiguity in indirect tax jurisprudence by holding that remuneration paid to whole-time directors constitutes salary under an employer-employee relationship and is not taxable as a service. This ruling resolves conflicting interpretations across adjudicating authorities and reinforces the statutory exclusion of employment-related payments from the scope of service tax.
Background & Facts
The Dispute
The dispute centered on whether service tax was payable on remuneration of Rs. 89,77,500 paid by JSL Industries Ltd to Smt. T. R. Amin, its whole-time director, for the period October 2015 to June 2017. The department demanded Rs. 13,30,501 as service tax under the Finance Act, 1994, arguing that the director’s functions amounted to a taxable service rendered to the company.
Procedural History
The case progressed through the following stages:
- March 2018: Show cause notice issued under Section 73(1) of the Finance Act, 1994, demanding service tax, interest, and penalty.
- December 2019: Adjudicating Authority confirmed the entire demand and imposed penalty under Section 76.
- March 2020: Commissioner (Appeals) upheld the demand, rejecting the appellant’s appeal.
- September 2025: Appeal heard before the CESTAT West Zonal Bench.
Relief Sought
The appellant sought to set aside the demand, arguing that the remuneration was salary paid to an employee and therefore excluded from the definition of "service" under Section 65B(44) of the Finance Act, 1994.
The Legal Issue
The central question was whether remuneration paid to a whole-time director, who is in full-time employment of the company, qualifies as a "service" under Section 65B(44) of the Finance Act, 1994, or whether it falls within the statutory exclusion for services provided by an employee to an employer.
Arguments Presented
For the Appellant
The appellant contended that Smt. T. R. Amin was a whole-time director appointed under a formal agreement and compensated as an employee. Reliance was placed on:
- Section 65B(44), which explicitly excludes services rendered by an employee to an employer.
- Section 2(51) and Section 2(94) of the Companies Act, 2013, which classify whole-time directors as key managerial personnel and employees.
- Income Tax Form 16 filings and annual general meeting resolutions confirming her employment status.
- Precedents from Bengal Beverages Pvt. Ltd., Allied Blenders and Distillers, and Supreme Treon Pvt. Ltd., all decided by the same Tribunal.
- CBDT Circular No. 115/09/2009, clarifying that director remuneration is not commission and not liable to service tax.
For the Respondent
The department maintained that the director’s functions involved independent decision-making and strategic oversight, which constituted a service distinct from employment. It argued that the nature of the payment, not the label, determined taxability, and that prior Tribunal decisions were not binding in this instance.
The Court's Analysis
The Tribunal conducted a comprehensive statutory and jurisprudential review. It emphasized that Section 65B(44) of the Finance Act, 1994, unambiguously excludes from the definition of "service" any activity performed by an employee for an employer in the course of employment. The Court held that the characterization of the relationship, not the title of the role, is decisive.
"We find that the position of a whole-time director is a position of significance under the Companies Act. Moreover, a whole-time director is considered and recognized as 'key managerial personnel' under Section 2(51)... Thus, in our view, the whole-time Director is essentially an employee of the Company."
The Tribunal noted that the company had consistently treated Smt. Amin as an employee: her remuneration was disclosed in Form 16, taxed as salary under the Income Tax Act, and approved by shareholders via special resolution. The department failed to produce any evidence to rebut this classification.
The Court also relied on judicial discipline, citing its own prior decisions in Ratnamani Metals and Tubes Ltd and Supreme Treon Pvt. Ltd., which had reached identical conclusions under identical facts. It rejected the department’s attempt to distinguish those cases, noting that the legal principles were directly applicable.
The Tribunal further affirmed the relevance of CBDT Circular No. 115/2009, which explicitly states that remuneration paid to directors, whether whole-time or independent, is not liable to service tax as commission. The circular, though not legislative, was treated as authoritative guidance consistent with statutory intent.
The Verdict
The appellant prevailed. The Tribunal held that remuneration paid to a whole-time director, when structured as salary and supported by employment documentation, is not a taxable service under Section 65B(44) of the Finance Act, 1994. The demand for service tax, interest, and penalty was set aside in full.
What This Means For Similar Cases
Director Remuneration Is Presumed Salary Unless Proved Otherwise
- Practitioners must now treat remuneration to whole-time directors as salary unless the department can prove a clear contractual or functional distinction from employment.
- Companies should maintain Form 16, board resolutions, and employment agreements to substantiate the employer-employee relationship.
- Tax authorities cannot rely on the title "director" alone to impose service tax.
Precedent Binding Within Same Tribunal Bench
- Decisions by a Tribunal bench on identical facts are binding on subsequent cases before the same bench, reinforcing judicial discipline.
- Practitioners should cite prior CESTAT rulings on director remuneration as persuasive authority, especially when the facts mirror those in Ratnamani Metals and Supreme Treon.
Circulars and Statutory Definitions Trump Revenue’s Interpretation
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CBDT circulars interpreting statutory exclusions carry weight when aligned with legislative intent.
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The Tribunal prioritized the statutory exclusion in Section 65B(44) over the department’s expansive interpretation of "service," reinforcing the principle that tax liabilities must be strictly construed.
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Companies must ensure that director compensation structures are documented as salary, not fees, to avoid retrospective tax exposure.
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Auditors and tax advisors should review director compensation agreements for compliance with employment classification under the Companies Act and Finance Act.
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Appeals against similar demands should be filed with reference to the cited precedents and the CBDT circular.
