The Chennai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that remuneration paid to whole-time directors who are in the whole-time employment of the company, evidenced by employment agreements and deduction of TDS under Section 192 of the Income-tax Act, falls within the exclusion for services provided by an employee to the employer in the course of employment under Section 65B(44)(b) of the Finance Act, 1994, and therefore does not attract service tax under the reverse charge mechanism.
The Tribunal also held that payment by way of commission, profit-linked remuneration, bonus or other variable components does not by itself displace the employer-employee relationship where the underlying employment arrangement is established. In addition, where service tax on remuneration to non-whole-time directors had already been discharged by another office of the appellant and evidenced through ST-3 returns, and there was no centralized registration, the same liability could not validly be demanded again from the Salem office in the absence of contrary evidence from the Revenue.
The Division Bench comprising Ajayan T.V. (Judicial Member) and M. Ajit Kumar (Technical Member) noted that the sole issue for determination was whether remuneration paid to the directors was exigible to service tax. It relied substantially on its own earlier decision in the appellant’s case, Final Order No. 40776/2025, where it had already held that remuneration paid to whole-time directors functioning in an employer-employee relationship is covered by the exclusion in Section 65B(44)(b) of the Finance Act, 1994 and is therefore outside the scope of taxable service.
The Tribunal observed that the employment agreements expressly created an employer-employee relationship, the directors worked on a full-time basis, were not free to engage in other employment without consent, and the remuneration was subjected to TDS under Section 192 with Form 16 issued. It further observed that variable pay or profit-linked commission does not alter the employer-employee character of the relationship. The Tribunal also referred to the Board Circular dated July 31, 2009 and a consistent line of Tribunal authorities taking the same view.
The Tribunal further observed that the present statements of demand were premised on the earlier show cause notice and that the order arising from that show cause notice had already been set aside in the appellant’s own case. It found that the later statements of demand did not rely on any separate facts or independent evidence apart from details furnished by the appellant. As regards the non-whole-time directors, the Tribunal found no reason to disbelieve the appellant’s ST-3 returns showing discharge of service tax from the Bhubaneswar office, especially when the adjudicating authority had neither caused verification from the jurisdictional officers nor put the appellant to notice of any further evidence required. It also found merit in the contention that, absent centralized registration, service tax relating to services received by the Bhubaneswar office could not be demanded from the Salem office.
Briefly, the appeals were filed by Thriveni Earth Movers Pvt Ltd. against a common Order-in-Original, by which service tax, interest and penalties were confirmed on remuneration paid to the company’s directors under the reverse charge mechanism. The dispute arose from successive statements of demand, all of which relied upon the same foundational allegation taken earlier in Show Cause Notice, namely that services provided by directors to the company were taxable under reverse charge.
The appellant contended that the directors had entered into employment agreements, that Clause 3.4 of those agreements expressly recorded an employer-employee relationship, and that tax had been deducted under Section 192 of the Income-tax Act with Form 16 having been issued, showing the payments were treated as salary. In relation to two non-whole-time directors for part of the later period, the appellant also contended that the Bhubaneswar office had already discharged the applicable service tax and reflected the same in ST-3 returns, and that in the absence of centralized registration such demand could not be raised again from the Salem office.
