Top Stories Remuneration paid to Whole-Time Directors of Company in the form of Commission based on Profit constitutes an Employer-Employee Relationship, No Service Tax Applicable: CESTAT [Read Order] By Devanand T R – On March 18, 2024 9:02 pm – 2 mins read The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), West Zonal Bench at Ahmedabad has held that the remuneration paid to whole-time directors of a company in the form of a commission based on profit constitutes an employer-employee relationship, thereby exempting it from service tax. The ruling came in response to the Service Tax Appeal filed by Gujarat Guardian Ltd. against the Commissioner of Central Excise, Customs and Service Tax, Bharuch.

The case revolved around Gujarat Guardian Ltd, a manufacturer of Float Glass, which had paid Rs.5,78,59,139/- as commission on profit to one of its directors, Shri Alok Kumar Modi, during the financial year 2013-14. The appellant, represented by Shri S J Vyas argued that the payment to the director was part of his remuneration as a whole-time director of the company, thus establishing an employer-employee relationship. The respondent revenue, represented by Shri G Nair, Assistant Commissioner (AR), contended that this payment was subject to service tax under the Finance Act, 1994, as it constituted a service provided by one person to another for consideration.

The issue was whether the commission on profit should be considered part of the director’s salary and whether this relationship exempted the payment from service tax liability. The CESTAT examined the provisions of the Companies Act, 2013 and relevant legal precedents. The bench referenced the case of M/s Bengal Beverages Pvt. Ltd. Vs. CGST & Excise, Howrah, wherein it was held that whole-time directors are essentially employees of the company, entitled to receive remuneration as per the provisions of the Companies Act, 2013.

The bench stressed that the mere fact that the remuneration was in the form of variable pay, such as commission on profit, did not alter the employer-employee status between the company and its directors. The CESTAT also emphasised that whole-time directors hold significant positions under the Companies Act, are considered key managerial personnel, and are held responsible for any defaults or violations. Therefore, their remuneration, including commission on profit, is part of the employer-employee relationship and not subject to service tax, irrespective of the form of remuneration. In result, the two-member bench comprising Ms. Sulekha Beevi C.S. (Judicial Member) and Mr. C L Mahar (Technical Member) held that the order-in-original is without any merit and set aside the same, allowing the appeal filed by the appellant.