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By Deepak K Gujrati FCA

The purpose of this article is to remind professionals to recheck the various documents and records of the company to ensure that there is no doubt about the application of service tax on remuneration payable to directors.

The Finance Act 2012 has introduced Service Ttax which is applicable to anyone who provides a Service not covered under the negative/exempted list and if the value of annual revenue is more than Rs. 10 lakh.


Central Government has further enlarged the scope of Reverse Chargew.e.f. 7th August, 2012 that Service provided by the director of the company to the said company will be covered under reverse charge mechanism and 100% tax shall be paid by the Company.



In view of the above, question arose whether remuneration payable to the directors will also attract Service Tax?


From the definition of Service [section 65 B clause (44)] it understood that Remuneration payable to the director will not attract service tax if it is a payment for service provided by the director in the course of employment. Central Government wants to cover only the non-executive directors who are not the employee of the company.





When can be a payment to a director be treated as services provided by him in the course of employment?

The issue has been examined by various courts for deciding whether any payment made to director should be taxed as Income from Salary or Income from business or profession. There is no standard rule but there are various documents like

Resolution for his appointment,

payment of remuneration,

Articles of Association of the company,

Form No 32 filed with ROC

which give enough indication about the role and responsibility of director. Generally remuneration payable to Managing Director, Whole time director and Executive Director is treated as Salary paid during the course of employment.

In  Ram Prashad's case the Supreme Court says that :

"It is again true that a director of a company is not a servant but an agent inasmuch as the company cannot act in its own person. A managing director may have a dual capacity. He may both be a director as well as an employee. It is, therefore, evident that in the capacity of a managing director he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee, or an agent depending upon the nature of his work and the terms of his employment. In other words, whether or not a managing director is a servant of the company apart from his being a director can only be determined by the articles of association and the terms of his employment. "




Who is a non-executive director?


A non-executive director (NED) typically does not engage in the day-to-day management of the organization, but is involved in policy making and planning exercises. In addition, non-executive directors' responsibilities include monitoring of the executive directors and to act in the interest of stakeholders. Also called external director, independent director and outside director.


So the terms of Agreement or Resolution passed should be clear about the responsibilities and remuneration payable to a Director.



Generally private limited companies appoint Directors who along with relatives are substantial shareholder in the company. The issue may arise when Director is having full control and management of the company, how can there be employer and employee relationship?

The Calcutta High Court in Sajid Mowjee v Income-Tax Officer (279 ITR 467)  held that it is not the character of the recipient but the character of the receipt that is material for the purpose of determining under which head the receipt should be treated for the purpose of Income-Tax. The character of the receipt has to be determined by reason of the relationship between an employer and employee. A person engaged to manage a business may be a servant or an agent according to the nature of his service and the authority of his employment. It is not possible to lay down any precise rule of law to distinguish one kind of employment from the other.

In other words share holding by the director has no role to play to decide whether receipt by directors is salary income or Income from business and profession.




Can a director be whole time director in more than one company? What evidence is required to prove that the director is part time executive director?

It is true that one person can be whole time director in one company only. But there is no restriction on being part time executive director. So the resolution, the agreement should be so drafted that it gives no space for any confusion.




Records like Form 32 ( option for executive director is taken ), Terms of Agreement ( responsibilities and remuneration payable) , Resolution , Article of Association of the company should be rechecked and corrections made if required to ensure that no service tax liability is attracted on remuneration payable to director which is taxable as Salary Income. Please also ensure that TDS is also to be deducted u/s 192 of the Income Tax Act.





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