CESTAT Chennai Sets Aside Service Tax Demand on Directors’ Remuneration, Grants Relief to Thriveni Earth Movers

May 27, 2026 : In a significant ruling on the taxability of directors’ remuneration under the erstwhile service tax regime, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, has allowed the appeals filed by Thriveni Earth Movers Pvt. Ltd. and quashed service tax demands raised on remuneration paid to its whole-time directors. The Tribunal held that remuneration paid to directors functioning as employees of the company falls within the employer-employee relationship and is therefore excluded from the definition of “service” under the Finance Act, 1994.

The decision was delivered by a Bench comprising Judicial Member Ajayan T.V. and Technical Member M. Ajit Kumar on May 27, 2026, while deciding three connected appeals arising from a common adjudication order passed by the Commissioner of GST and Central Excise, Salem. The dispute related to service tax demands covering the period from April 1, 2014, to June 30, 2017.

The controversy originated from a series of Statements of Demand issued by the department alleging that remuneration paid by the company to its directors was liable to service tax under the reverse charge mechanism. The department relied upon Notification No. 45/2012-ST, which brought services provided by directors to companies within the ambit of reverse charge taxation. Based on this interpretation, demands along with interest and penalties were confirmed against the company.

Before the Tribunal, Thriveni Earth Movers argued that its directors were not independent service providers but employees working under formal employment agreements. The company pointed out that the directors were appointed on a full-time basis, were subject to company rules and regulations, received salaries, and had tax deducted at source under Section 192 of the Income Tax Act, 1961. Form 16 certificates were also issued, demonstrating the existence of an employer-employee relationship. The company contended that such services were specifically excluded from the definition of “service” under Section 65B(44)(b) of the Finance Act, 1994.

The Tribunal accepted these submissions and relied heavily on its earlier decision involving the same assessee. It observed that the directors had entered into employment agreements clearly recognizing an employer-employee relationship and were entrusted with managing the day-to-day affairs of the company. The Bench noted that whole-time directors are recognized as “key managerial personnel” under the Companies Act and are accountable for statutory compliance, which further supports their status as employees.

While examining the legal framework, the Tribunal referred to Section 65B(44) of the Finance Act, 1994, which excludes “a provision of service by an employee to the employer in the course of or in relation to his employment” from the scope of taxable services. The Bench found that the remuneration paid to the directors was treated as salary, subjected to TDS under Section 192 of the Income Tax Act, and supported by Form 16 documentation. These factors, according to the Tribunal, conclusively established an employer-employee relationship.

The Bench observed that “the whole-time director is essentially an employee of the company” and that merely because a director receives variable compensation linked to company profits or performance, such remuneration does not lose its character as salary. It further held that payments such as commission, profit-linked incentives, stock options or performance bonuses do not alter the fundamental employer-employee relationship when the director functions as a full-time employee.

The Tribunal also relied on a series of earlier decisions, including Maithan Alloys Ltd., Allied Blenders & Distillers Pvt. Ltd., Alchemie Organics, Lilanand Magnesites Pvt. Ltd., Dixcy Textiles Pvt. Ltd., and Vinayaka Electro Alloys Pvt. Ltd., all of which had taken the view that remuneration paid to whole-time directors acting as employees is not liable to service tax under the reverse charge mechanism.

Apart from the issue concerning whole-time directors, the Tribunal also considered the company’s submissions regarding two non-whole-time directors. The company demonstrated that service tax liability relating to these directors had already been discharged through its Bhubaneswar office and reflected in ST-3 returns. The Bench noted that the adjudicating authority had failed to verify the returns or obtain clarification from the jurisdictional authorities at Bhubaneswar before rejecting the company’s claim.

The Tribunal further found merit in the contention that, in the absence of centralized registration, service tax relating to services received at the Bhubaneswar office could not be demanded from the Salem office. It observed that the department had produced no evidence showing that the directors concerned rendered services to the Salem establishment during the relevant period.

Significantly, the Tribunal noted that the very foundation of the subsequent Statements of Demand rested on an earlier show cause notice and adjudication order that had already been set aside in the company’s favour in 2025. Since the subsequent proceedings relied upon the same factual and legal basis, the Bench held that the impugned demands could not survive.

Allowing all three appeals, CESTAT ruled that service tax demands, interest and penalties imposed on the company were unsustainable. The decision reinforces a growing line of judicial precedents holding that remuneration paid to whole-time directors who function as employees does not constitute consideration for taxable services and therefore falls outside the scope of service tax under the reverse charge mechanism. The ruling is expected to provide relief to companies facing similar disputes under the pre-GST service tax regime and offers clarity on the distinction between employee remuneration and taxable director services.

Case Reference : Thriveni Earth Movers Pvt. Ltd. v. Commissioner of GST and Central Excise