The Customs, Excise and Service Tax Appellate Tribunal (Hyderabad Regional Bench) has dismissed the Revenue's appeal against the Commissioner's order dropping proceedings for recovery of Service Tax amounting to Rs. 9,98,13,384 under the Reverse Charge Mechanism for remuneration paid to the Managing Director and Whole-time Directors. The Tribunal held that the remuneration constituted salary paid in the course of an employer-employee relationship and was excluded from the definition of 'service' under Section 65B(44)(b) of the Finance Act, 1994.
Background & Facts
The Genesis of the Dispute
The Revenue initiated proceedings against Biological E Ltd. for recovery of Service Tax under the Reverse Charge Mechanism for remuneration paid to its Managing Director and Whole-time Directors for the period April 2013 to June 2017. The Show Cause Notice proposed recovery of Rs. 9,98,13,384.
Key Facts
- The respondent-company paid remuneration to its Managing Director and Whole-time Directors during the period April 2013 to June 2017.
- The company treated the remuneration as salary, deducted TDS under Section 192 of the Income Tax Act, issued Form-16, and made provident fund contributions.
- The Independent Director's remuneration was treated separately, with TDS deducted under Section 194J and GST under Reverse Charge discharged after 01.07.2017.
- The company consistently distinguished between employee-directors and non-employee directors in its statutory compliances.
- The Managing Director and Whole-time Directors were appointed under Sections 196 and 197 of the Companies Act, 2013, with Board resolutions and shareholder approvals.
Procedural History
- 19.06.2020: Commissioner of Central Tax & Central Excise, Hyderabad passed Order-in-Original No. HYD-EXCUS-003-COM-004-20-21 dropping the proceedings.
- Appeal No. ST/30337/2020: Filed by the Revenue before the CESTAT Hyderabad Regional Bench.
- 10.06.2026: Date of hearing.
- 22.07.2026: Final order passed by the Tribunal.
The Parties' Positions
For the Appellant (Revenue)
- Argued that directors are separate legal persons from the company and the remuneration paid to them represents consideration for services rendered as directors.
- Contended that the relationship of employer and employee cannot be inferred merely because TDS was deducted under Section 192 or provident fund contributions were made.
- Relied on the definition of 'service' under the Finance Act, 1994 to assert that the remuneration was taxable under the Reverse Charge Mechanism.
For the Respondent (Biological E Ltd.)
- Submitted that the Managing Director and Whole-time Directors were appointed under the Companies Act, 2013 and their remuneration was treated as salary throughout.
- Argued that the exclusion under Section 65B(44)(b) of the Finance Act, 1994 applied as the remuneration was paid in the course of employment.
- Cited CBIC Circulars and judicial precedents to support the position that remuneration subjected to TDS under Section 192 represents salary and is excluded from Service Tax.
Relief Sought
The Revenue sought to set aside the Order-in-Original dated 19.06.2020 and reinstate the proceedings for recovery of Service Tax amounting to Rs. 9,98,13,384 along with applicable interest and penalties.
The Legal Issue
The central question was whether remuneration paid to the Managing Director and Whole-time Directors during the relevant period represented consideration for taxable services rendered by directors or salary paid by an employer to its employees, thereby falling within the exclusion under Section 65B(44)(b) of the Finance Act, 1994.
Arguments Presented
For the Appellant (Revenue)
- The Revenue contended that directors are separate legal persons from the company and the remuneration paid to them represents consideration for services rendered as directors.
- Argued that the relationship of employer and employee cannot be inferred merely because TDS was deducted under Section 192 or provident fund contributions were made.
- Relied on the definition of 'service' under the Finance Act, 1994 to assert that the remuneration was taxable under the Reverse Charge Mechanism.
For the Respondent (Biological E Ltd.)
- Learned Counsel for the respondent submitted that the Managing Director and Whole-time Directors were appointed under Sections 196 and 197 of the Companies Act, 2013.
- Argued that their remuneration was treated throughout as salary, TDS was deducted under Section 192, Form-16 was issued, and provident fund contributions were made.
- Cited CBIC Circular No. 115/9/2009-ST dated 31.07.2009 and Circular No. 140/10/2020-GST dated 10.06.2020 to support the position that remuneration subjected to TDS under Section 192 represents salary and is excluded from Service Tax.
- Relied on judicial precedents, including Amara Raja Batteries Ltd. v. Commissioner of Central Tax, Tirupati [2024 (390) ELLT 361 (Tri-Hyd)], to argue that a Managing Director or Whole-time Director may simultaneously be a promoter and yet remain an employee of the company.
The Court's Analysis
The Tribunal examined the statutory framework governing the appointment of the Managing Director and Whole-time Directors, including the Companies Act, 2013, Board resolutions, and shareholder approvals. It noted that the respondent consistently treated the remuneration as salary, deducted TDS under Section 192, issued Form-16, and made provident fund contributions. The Tribunal observed:
"From the records produced before us, it is evident that the Managing Director and Whole-time Directors were appointed by resolutions of the Board and approved by the shareholders in accordance with the provisions of the Companies Act. Their remuneration consisted of salary and other employment related benefits. TDS was deducted under Section 192 of the Income Tax Act applicable only to salary Income. Form-16 was issued and provident fund contributions were deposited. These undisputed facts clearly indicate that the company itself treated the remuneration as salary arising out of an employer-employee relationship."
The Tribunal relied on Section 65B(44)(b) of the Finance Act, 1994, which excludes from the definition of 'service' any service provided by an employee to the employer in the course of employment. It held that once the existence of an employer-employee relationship is established, the charging provisions of Service Tax cease to operate and the provisions relating to Reverse Charge also become inapplicable.
The Tribunal also considered the Hon'ble Supreme Court's decision in Ram Pershad v. CIT (1972) 2 SCC 696, which held that a director can simultaneously function as an employee if the terms of appointment establish a relationship of master and servant. It noted that the articles of association, Board resolutions, and statutory framework governing the appointment of the Managing Director and Whole-time Directors satisfied these requirements.
The Tribunal further observed that the Revenue had not produced any evidence demonstrating that the directors were rendering services independently in the capacity of professionals. On the contrary, every statutory document maintained by the respondent consistently treated them as employees. The Tribunal held:
"The expression 'promoter-director' has no independent significance under the Finance Act so as to deny the statutory exclusion contained in Section 65B(44)(b) of the Finance Act, 1994."
The Tribunal also noted that the Income Tax Department had accepted the deduction of tax under Section 192, treating the remuneration as salary. It held that the indirect tax authorities cannot, in the absence of contrary evidence, adopt a completely inconsistent stand regarding the very same payment.
The Verdict
The CESTAT Hyderabad Regional Bench dismissed the Revenue's appeal. The Tribunal held that the remuneration paid by the respondent-company to its Managing Director and Whole-time Directors during the relevant period constituted salary paid in the course of an employer-employee relationship. Consequently, the remuneration fell within the exclusion provided under Section 65B(44)(b) of the Finance Act, 1994 and no Service Tax was payable under the Reverse Charge Mechanism. The impugned order dated 19.06.2020 was upheld, and the appeal was dismissed.
What This Means For Similar Cases
Employer-Employee Relationship Is Key
- The judgment reaffirms that the exclusion under Section 65B(44)(b) of the Finance Act, 1994 applies where remuneration is treated as salary, TDS is deducted under Section 192, and statutory compliances are undertaken as an employer-employee relationship.
- Practitioners must ensure that the terms of appointment, Board resolutions, and shareholder approvals clearly establish an employer-employee relationship to avail the exclusion.
Consistency in Statutory Treatment Matters
- The Tribunal emphasized the importance of consistency in the treatment of remuneration across different statutes. If the Income Tax Department treats the remuneration as salary, the indirect tax authorities cannot adopt a contradictory stance without evidence.
- Practitioners should maintain uniformity in the treatment of remuneration across Income Tax, Service Tax, and GST regimes to avoid disputes.
Promoter-Directors Can Be Employees
- The judgment clarifies that a director can simultaneously be an employee if the terms of appointment establish a relationship of master and servant.
- The expression 'promoter-director' has no independent significance under the Finance Act, 1994 to deny the statutory exclusion.
Reliance on Circulars and Precedents
- The Tribunal relied on CBIC Circulars and judicial precedents to support its findings. Practitioners should cite relevant circulars and precedents to strengthen their arguments in similar cases.
No Service Tax Under Reverse Charge for Salary Payments
- The judgment confirms that remuneration paid as salary to Managing Directors and Whole-time Directors is not liable to Service Tax under the Reverse Charge Mechanism.
- Practitioners should advise clients to maintain proper documentation to substantiate the employer-employee relationship and avoid unnecessary tax demands.
