Custom, Excise & Service Tax Tribunal
Thriveni Earth Movers Pvt Ltd vs Salem on 30 July, 2025
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
CHENNAI
REGIONAL BENCH - COURT No. I
Service Tax Appeal No. 40102 of 2016
(Arising out of Order-in-Original No. 15/2015 (ST-Commr.) dated 23.10.2015 passed by
Commissioner of Central Excise, No. 1, Foulks Compound, Anai Road, Salem - 636 001)
M/s. Thriveni Earth Movers Pvt. Ltd. ...Appellant
No. 22/110, Greenways Road,
Farilands,
Salem - 636 016.
Versus
Commissioner of GST and Central Excise ...Respondent
Salem Commissionerate,
No. 1, Foulks Compound,
Anai Road,
Salem - 636 001.
APPEARANCE:
For the Appellant : Mr. Prateek Marlecha, Consultant
For the Respondent : Mr. M. Selvakumar, Authorised Representative
CORAM:
HON'BLE MR. VASA SESHAGIRI RAO, MEMBER (TECHNICAL)
HON'BLE MR. AJAYAN T.V., MEMBER (JUDICIAL)
FINAL ORDER No. 40776 / 2025
DATE OF HEARING : 28.02.2025
DATE OF DECISION : 30.07.2025
Per Mr. VASA SESHAGIRI RAO
This Service Tax Appeal No. ST/40102//2016 has
been filed by M/s. Thriveni Earth Movers Pvt. Ltd. (hereinafter
referred to as 'Appellant') assailing the Order-in-Original No.
15/2015-(ST-Commr.) dated 23.10.2015 passed by the
Commissioner of Central Excise, Salem.
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ST/40102/2016
2.1 Brief facts of the appeal are that the Appellants
are holders of Service Tax Registration and are providing
mining services and recipient of GTA service. During
verification of the financial records of the Appellant, the
Department found that the Appellants have paid periodical
remuneration and other payments to the Directors of the
Appellant company as per the Table given below for the
services rendered by them to the Appellant company for the
period Aug 2012 to March 2014 but have not discharged the
Service Tax thereon.
Sl. Name of the Director Renumeration Renumeration Renumeration
No. received during received received
Aug 2012 to Feb during March during Jan 14
2013 (in Rs) 13 to Dec to March 14
2013 (in Rs) (in Rs)
1 P. Balasubramanian 2,10,00,000 1,20,00,000 60,00,000
(CHAIRMAN)
2 B.Prabhakaran 2,10,00,000 1,45,00,000 1,65,00,000
(Managing Director)
3 B.Karthikeyan (Director) 2,10,00,000 1,45,00,000 1,65,00,000
4 B.Vasuki(Director) 70,00,000 40,00,000 20,00,000
5 V.Sakthivel(Director) 24,00,000 27,00,000 9,00,000
Finance
6 PRADIPTAKUMAR 19,36,000 19,36,000 8,00,000
Mistra(Director)Projects
7 K.K.Biran(Director)Mines 19,36,000 21,36,000 6,00,000
& Business
Development)
GRAND TOTAL 7,62,72,000 5,17,72,000 4,33,00,000
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ST/40102/2016
2.2 Consequently, the Show Cause Notice
No. 81/2014 (ST)(COMMR) dated 29.09..2014, was issued
alleging that the Appellants have contravened the provisions
of Sections 67 & 68 of Finance Act 1994, read with Rule
2(1)(d)(i)(EE) and Rule 6 of Service tax Rules, 1994 and also
Notification No.30/2012- ST dated 20.06.2012 inasmuch as
they failed to pay appropriate service tax under the reverse
charge on the services rendered by the Directors of the
company and received by the Appellant during the period
from Aug 12 to March 2014.
2.3 The Appellants were called upon to show cause
as to why: -
Service Tax of Rs.2,11,78,118 should not be demanded from
them under Section 73(1) of the Finance Act, 1994 along
with applicable interest under Section 75 of the Act and
imposition of Penalty under Section 76 of the Finance Act,
1994.
2.4 In response, the Appellants submitted that there
is no service provided by the aforesaid Directors to the
Company as they are whole time directors engaged in day
to-day affairs of the company and there exists a employer -
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ST/40102/2016
employee relationship, hence, no tax is liable to be paid
under reverse charge mechanism.
2.5 After due process of Law, the Adjudicating
Authority has confirmed the demand as proposed in the SCN
and imposed penalty.
2.6 Aggrieved by the aforesaid order, the Assessee
has filed an Appeal which is now before this forum vide
Appeal No. ST/40102/2016-DB.
3.1 The Ld. Chartered Accountant Shri Prateek
Marlecha has argued for the Appellant and contended that: -
i. As per Sec. 65B (44)(b) of the FA 1994, provision of
service by an employee to the employer in the course of
or in relation to his employment, shall be excluded from
the definition of service.
ii. All the Directors have entered into an employment
agreement with the Appellant which specifically states
that the agreement constitutes an employer -employee
relationship between the appellant and the Director.
iii. The Directors are employees of the Appellant and
observe all the rules and regulations which any other
employee is required to follow. The directors are
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ST/40102/2016
providing services to the Appellant in the course of
employment.
iv. While remitting the salary, the Appellant has deducted
TDS under Section 192 of the Income Tax Act and issued
Form 16 to the employee Directors. The form -16 is
issued when there is an employer - employee
relationship.
v. The appellant relied on the decision of the Hon'ble
CESTAT in the case of Maithan Alloys Limited Vs C.CEx.
& ST [2020 (33) GSTL 228 (Tri.-Kolkata)] wherein it was
held that whole time directors are employees of the
company and when TDS is deduced under section 192 of
the Income tax Act and Form 16 has been issued, the
directors are considered to be employees of the
company and therefore, service tax under reverse
charge is not payable.
vi. Further the appellant also relied on the decision of the
Hon'ble Mumbai Tribunal in the case of Allied Blenders
and Distillers Pvt. Ltd. Vs. CCEx & ST [2019 (24) GSTL
207] wherein it has been held that the remuneration
paid to Directors who are also employees of the
company is not liable to service tax under reverse
charge mechanism.
vii. Reliance was also placed on the decision of the
Hon'ble Ahmedabad Tribunal in the case of Alchemie
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ST/40102/2016
Organics Vs. CCEx & ST [(2024) 25 Centax 381] wherein
it was held that the remuneration (salary+ allowances +
commission on profit of company) is not liable to service
tax under reverse charge mechanism.
viii. In addition, reliance was also placed on the following
decisions:
a. Vectus Industries Ltd v. CST - Final Order No.
71942/2019 dated 26.11.2019 of the CESTAT Allahabad
b. Bengal Beverages Pvt Ltd v. CGST & Excise, Howrah -
Final Order No. 75561 / 2020 dated 09.10.2020 of the
CESTAT, Kolkata
ix. They have relied on Circular No. 140/10/2020-GST
dated 10.06.2020 issued by the CBIC wherein it was
clarified that Director's remuneration which are
declared as 'Salaries' in the books of a company and
subjected to TDS under Section 192 of the IT Act, are
not taxable being consideration for services by an
employee to the employer in the course of or in relation
to his employment in terms of Schedule III of the CGST
Act, 2017. Though the circular has been issued in the
context of the CGST Act, 2017, the principles emerging
from the above circular can be used for the Service tax
provisions also.
x. The Ld. Adjudicating Authority has held that there is no
employer-employee relationship between the Directors
and the appellant which is erroneous.
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ST/40102/2016
xi. The Appellant submits that the findings in the impugned
order are mere statements of the learned adjudicating
authority not supported by any legal backing. The
appellant submits that the provisions of Companies Act
1956 itself allows the Director's remuneration to be fixed
based on the percentage of profit of company. Further,
Tribunal Ahmedabad, in the case of Alchemie Organics
referred Supra has held that the renumeration including
salary, allowance and Commission based on profits of
company is not liable to service Tax under Reverse
charge mechanism.
xii. The Appellant further relied on the decision of the
decision rendered by the Tribunal Ahmedabad in the
case of Lilanand Magnesites Pvt. Ltd. Vs. C.CEx. & ST
[(2025) 26 CENTAX 172 (Tri-Ahmd)] wherein it was held
that commission paid to Directors as percentage of
Company's profits is not liable to service tax under
reverse charge mechanism where it constitutes a part of
the salary /renumeration structure and director is
treated only as an employee.
xiii. Finally, it was submitted that the renumeration paid to
all the directors who are also employees of the Appellant
is not liable to service tax under reverse charge and
made a plea to allow the Appeal in their favor.
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ST/40102/2016
4. The Ld. Authorized Representative Shri M.
Selvakumar represented the Department. He has supported
the findings in the impugned Order-in-Original No. 15/2015-
(ST-COMMR) dated 23.10.2015. He has argued that the
Directors are being paid sitting fees and even profits of the
appellant company. If the employee of the company enters
into contract with other firm wherein, he is of financial
interest, there is no employer and employee relationship
which is the case in respect of many Directors. Further, no
employee is given power to recruit and or dismiss another
employee. So, he has finally requested to reject the Appeal.
5. We have heard both the sides and considered
the written and oral submissions made and evidences
available on record.
6. The short issue involved for determination in the
present appeal is whether the remuneration paid to the
Directors by the appellant is chargeable to Service Tax and
whether the appellants are required to discharge Service Tax
under reverse charge mechanism in terms of Rule
2(1)(d)(i)EE read with Section 67 & 68 of the Finance Act,
and Rule 6 of the Service Tax Rules, 1994?
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ST/40102/2016
7. Facts in this appeal indicate that the Appellant
Company had paid remuneration to the Directors for the
services rendered by them. As the Appellant has failed to pay
appropriate service tax under Reverse Charge Mechanism on
the remuneration paid to the Directors of the Company for
the period from 07.08.2012 to 31.03.2014 amounting the
Rs.2,11,78,118/-, proceedings were initiated against them.
The Adjudicating Authority in his impugned order has held
that there is no employer-employee relationship between the
Directors and the appellant, and on analyzing the
functions/activities carried out by the respective Directors to
the Appellant, none of the functions/ activities carried out by
the Directors of the company are covered under the Negative
list of services as prescribed under Section 65B (44)(b) of
Finance Act 1994 or covered under any exemption
notification in force and as there was no specific exclusion
and exemption available the "Directors renumeration" has to
be subjected to tax.
8. The provision of Section 65B (44) of the Finance
Act, 1994 reads as given below: -
"(44) "service" means any activity carried out by a person for
another for consideration, and includes a declared service, but shall
not include-
(a) an activity which constitutes merely, --
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ST/40102/2016
(i) a transfer of title in goods or immovable property, by way of sale,
gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to
be a sale within the meaning of clause (29A) of Article 366 of the
Constitution; or
(iii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the
course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for
the time being in force.
Explanation 1.- For the removal of doubts, it is hereby declared that
nothing contained in this clause shall apply to, --
(A) the functions performed by the Members of Parliament,
Members of State Legislative, Members of Panchayats, Members of
Municipalities and Members of other local authorities who receive
any consideration in performing the functions of that office as such
member; or
(B) the duties performed by any person who holds any post in
pursuance of the provisions of the Constitution in that capacity; or
(C) the duties performed by any person as a Chairperson or a
Member or a Director in a body established by the Central
Government or State Governments or local authority and who is not
deemed as an employee before the commencement of this section.
[Explanation 2.-For the purposes of this clause, the expression
"transaction in money or actionable claim" shall not include--
(i) any activity relating to use of money or its conversion by cash
or by any other mode, from one form, currency or
denomination, to another form, currency or denomination for
which a separate consideration is charged;
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ST/40102/2016
(ii) (ii) any activity carried out, for a consideration, in relation to,
or for facilitation of, a transaction in money or actionable
claim, including the activity carried out--
[ (a) by a lottery distributor or selling agent on behalf of the State
Government, in relation to promotion, marketing, organising, selling
of lottery or facilitating in organising lottery of any kind, in any
other manner, in accordance with the provisions of the Lotteries
(Regulation) Act, 1998 (17 of 1998.); ]
(b) by a foreman of chit fund for conducting or organising a chit in
any manner.]
Explanation 3.- For the purposes of this Chapter, -
(a) an unincorporated association or a body of persons, as the case may
be, and a member thereof shall be treated as distinct persons;
(b) an establishment of a person in the taxable territory and any of his
other establishment in a non-taxable territory shall be treated as
establishments of distinct persons.
Explanation 4.- A person carrying on a business through a branch or
agency or representational office in any territory shall be treated as
having an establishment in that territory;"
9. It is not disputed in this case that the
remuneration paid to the Directors was subjected to TDS
under Section 192 of the Income Tax Act and Form 16 were
issued. There are written employment agreements entered
into with the Appellant which have been perused. We find an
exclusive clause at 3.4 of the employment agreement that
this constitutes an employee-employer relationship between
the company and the Director. In this connection, we refer to
the Board's Circular No. 115/09/2009- ST dated 31.07.2009
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ST/40102/2016
which is binding on the Authorities, and which reads as given
below: -
"....
Para 3. In view of the above, it is clarified that
remunerations paid to Managing Director/Directors of
companies whether whole-time or independent when being
compensated for their performance as Managing
Director/Directors would not be liable to service tax.
.....
...."
10.1 We find that the Appellant has all along argued that the whole-time Directors have been paid salary and other remuneration which was subjected to Tax Deducted at Source (TDS) under the Income Tax Act and as such there is an employer-employee relationship which is excluded from the payment of service tax. All the seven Directors of the Company were appointed as whole time Directors of the Company by employment agreements. It appears that these Executive Directors were delegated with the work of managing the day-to-day affairs of the Company and they were not giving any advice to the Company in order to term them as service providers to levy service tax. Further we have perused the employment agreements (Pages 144 to 210 of the Appeal paper Book) signed by the Directors with the Appellant, and in Para 5.2 of the same, it is stated that "the Directors shall work on full time basis for the 13 ST/40102/2016 Company. The Director shall not be permitted to engage in any other employment, business or activity, whether or not for compensation or other pecuniary advantage, without the prior consent from the Board of Directors. Further in all the agreements, the Directors are also entitled to a percentage of the profits in addition to their fixed Pay. Further the Form 16 attached to the Appeal paper Book makes a mention that it is TDS deducted on Salary. 10.2 We also find that a whole-time director is considered and recognized as 'key managerial personnel' under Section 2(51) of the Companies Act. Further, he is an officer in default [as defined in clause (60) of Section 2] for any violation or non-compliance of the provisions of Companies Act. Thus, in our view, the whole-time Director is essentially an employee of the Company and accordingly, whatever remuneration is being paid in conformity with the provisions of the Companies Act, is pursuant to employer- employee relationship and the mere fact that the whole-time Director is compensated by way of variable pay will not in any manner alter or dilute the position of employer- employee status between the company /appellant and the whole-time Directors. We are thoroughly convinced that when the very provisions of the Companies Act make whole- time director (as also in capacity of key managerial 14 ST/40102/2016 personnel) responsible for any default/offences, it leads to the conclusion that those directors are employees of the Appellant company.
10.3 In view of the above discussion, it becomes clear that the activity of appointment of Directors and their services is covered under Negative List of services prescribed under Section 65B (44) (b) of the FA 1994 and so it follows that the impugned Order-in-Original No. 15/2015 (ST- Commr.) dated 23.10.2015 is not tenable.
11. The contention of the Ld. Chartered Accountant for the Appellant was that there is an employee-employer relationship and so, there could not be any service tax payment and any payment by way of commission, stock options, performance related bonus, etc. will not alter the nature of the service is acceptable. The issue of payment of service tax on the remuneration paid to the Directors is no more res-integra where it is termed as salary and subjected to TDS under Section 192 of the Income Tax Act, the employer and employee relationship gets established and the same is excluded from the purview of the service tax. We find that similar issue has been discussed in the case of M/s. Dixcy Textiles Pvt. Ltd. Vs. The Commissioner of Central Excise & Service Tax, Salem [2025 (5) TMI 316-CESTAT 15 ST/40102/2016 CHENNAI], wherein the Tribunal Chennai has held as follows: -
"6) The singular issue that arises for determination is whether the demand made on the appellant on the remuneration paid to its directors is tenable.
7) We note that the adjudicating authority has chosen to ignore the appellant's contention that there is an employer employee relation on the grounds that no appointment order has been produced. It is also seen that the adjudicating authority has noted the definition of salary as defined under Section 17(1) of the Income Tax Act, 1961 yet has chosen to hold that the directors are not employees as in his view, the term salary does not include remuneration, sitting fee etc., paid to the directors and thereby the exclusive clause of Section 65B(44) is inapplicable. Strangely, he has chosen to do so, without controverting the evidence adduced by the appellant along with its reply, by way of resolutions passed by the Board of Directors in accordance with the Companies Act which stated inter-alia that the directors concerned in the notice have been appointed as whole-time directors and will be entitled to a salary as may be fixed from time to time. He has also ignored the Form 16 issued as a Certificate under Section 203 of the Income Tax Act, 1961 for tax deducted at source on salary in respect of these directors that was adduced in evidence.
8) We also find that the Tribunal in Maithan Alloys Ltd v.
Commissioner of C.Ex & ST, Bolpur, 2020 (33) GST 228 (Tri- Kolkata) has held as under:
"6. In the instant case, it is not in dispute that service tax has been duly paid on remuneration paid to directors who are not whole-time employee directors. The only dispute herein is for payment of remuneration to whole time directors, which is a fact on record. The provisions of Companies Act, 2013, contained in Section 2(94), duly defines 'whole-time director' to include a director in the 16 ST/40102/2016 whole-time employment of the company. A whole-time director refers to a director who has been in employment of the company on a full-time basis and is also entitled to receive remuneration. We further 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) of the Companies Act. Further, he is an officer in default [as defined in clause (60) of Section 2] for any violation or non-compliance of the provisions of Companies Act. Thus, in our view, the whole-time director is essentially an employee of the Company and accordingly, whatever remuneration is being paid in conformity with the provisions of the Companies Act, is pursuant to employer-employee relationship and the mere fact that the whole- time director is compensated by way of variable pay will not in any manner alter or dilute the position of employer-employee status between the company assessee and the whole-time director. We are thoroughly convinced that when the very provisions of the Companies Act make whole-time director (as also in capacity of key managerial personnel) responsible for any default/offences, it leads to the conclusion that those directors are employees of the assessee company.
7. Further, in the present case, the appellant has duly deducted tax under Section 192 of the Income Tax Act which is the applicable provisions for TDS on payments to employees. This factual and legal position also fortifies the submission made by the appellant that the whole-time directors who are entitled to variable pay in the form of commission are 'employees' and payments actually made to them are in the nature of salaries. This factual position cannot be faulted in absence of any evidence to the contrary. The submission of Ld. DR as well as the finding made by the Commissioner in the impugned order that since the whole-time directors are compensated by way of 17 ST/40102/2016 variable pay and hence not employees, does not have any legal basis and is completely misplaced, and the same cannot be sustained. The decision of the Tribunal in Rent Works India (supra) has clearly set the legal position that when the Income Tax Department considers payment in the nomenclature 'consultancy fee' as salaries, on which TDS is also made, the said payments cannot be said towards rendition of taxable service for levy of service tax. The decision in case of PCM Cement Concrete Pvt. Ltd. (supra) has set the legal proposition that consideration paid to whole-time directors would be treated as payment of salaries inasmuch as there would be employer employee relationships and in such case the levy of service tax cannot be sustained.
8. In view of the above discussions and the settled legal judicial precedence and provisions contained in statutes referred to above, demand of service tax on remuneration paid to whole-time directors cannot be sustained and hence set aside. Since demand of service tax is set aside, penalty and interest are also not sustainable."
12. Also, similar view has been taken by the Tribunal in the cases of Amar Raja Batteries Vs. Commr. of Central Tax, Tirupathi GST, [(2024) 21 Centax 216 (Tri.-Hyd.)], and Allied Blenders & Distillers Pvt Ltd Vs. CCE & ST, Aurangabad, [2019 (24) GSTL 207 (Tri.- Mumbai)].
13. In a recent decision of this Tribunal in the case M/s. Vinayaka Electro Alloys Pvt. Ltd. vs Commissioner of GST & Central Excise, Salem, [2025 (6) TMI 13 - CESTAT CHENNAI], it was held that no service tax is payable under 18 ST/40102/2016 RCM on remuneration paid to whole-time directors functioning as employees. This judgment reinforces the principle that remuneration to whole-time directors, when functioning as an employee, does not attract service tax under RCM.
14. Appreciating the ratio of the above decisions as applicable to the facts of the present appeal, the impugned Order-in-Original No. 15/2015-(ST-COMMR) dated 23.10.2015 passed by the Commissioner of Central Excise, Salem 101/2015-ST dated 26.06.2015 cannot be sustained and as such, is ordered to be set aside. As such, both the demand of service tax and penalties confirmed in the impugned order are set aside.
15. Therefore, the appeal is allowed with consequential relief, if any, as per the law.
(Order pronounced in open court on 30.07.2025) Sd/- Sd/-
(AJAYAN T.V.) (VASA SESHAGIRI RAO) MEMBER (JUDICIAL) MEMBER (TECHNICAL) MK