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Directors- monthly payment, perquisites hiring and firing, etc. considered essential to establish employer-employee relationship between company and director be CESTAT. – Case of Brahm Alloy Ltd needed better representation, judgment deserve reconsideration

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Directors- monthly payment, perquisites hiring and firing, etc. considered essential to establish employer-employee relationship between company and director be CESTAT. – Case of Brahm Alloy Ltd needed better representation, judgment deserve reconsideration
May 9, 2019
All Articles by: CA DEV KUMAR KOTHARI       View Profile
  • Contents

Relevant provisions and contexts in which this article can be useful:

Reverse Charge Mechanism(RCM), Input Tax Credit(ITC), CONTRACTS Act, COMPANIES ACT  and general trade practices ABOUT REMUNERATION AND SERVICES OF DIRECTORS.



General discussion:

In this write-up general discussion on related aspects of employment, employer- employee relationship, contracts, trade practices etc. have been made. Readers are advised to refer to relevant provisions applicable at relevant time with reference to actual facts and circumstances of the case and context of the matter under applicable provisions.

Company and shareholder:

Company is a separate corporate body and legal entity. Company and its shareholders are separate and distinct persons. It is now well settled position that even a 100% government held company is also not a department of government but it is a company and government is merely a shareholder. Law applicable to a company are generally applicable to a 100% government company also and some special provisions are also made applicable to government companies.

Similarly any person holding 100% shares in a company is also a shareholder of company and not owner of company or its properties. Even several shareholders who may be related or not who hold substantial stake in company are shareholders of company and not owner of company or properties of company.

A company can enter into contracts, understandings, and arrangements with shareholders in writing or verbally, express or implied. 

Company and director of company:

Each director of company is agent and an officer of company. Director, when acting on behalf of company has to act on behalf of company, otherwise company may not be liable and director who enter into any contract without on behalf of company can be personally liable.

A person can be director in several company. While acting on behalf of any company he must specify the company on whose behalf and account he is acting.

A person who is a director in a company continue to have his own personal rights, duties, obligations and liabilities to vis a vis  every one including companies in which he is a director.

Any shareholder, any director can sue company and company can sue   any shareholder or director if situations so require.


Contracts can be in writing or oral. Contracts can be express or implied.  Contracts can be partly in writing and partly orally.

When any terms and conditions are not specified, applicable law,  constitution of any party to contract for example in case of  company its Memorandum (MOA)  and Articles of Association (AOA) and the Companies Act and Rules formulated under the Act , general trade practices, usages, customs, standing orders, etc. may be applicable.

This is also applicable to contracts of employment and contracts between company and its directors for working for an on behalf of company.

Director, Board of directors and shareholders:

A director is to work as per and within limitations as  applicable under  law, MOA, AOA,  policies of company which are formulated by the Board of Directors and in some cases by shareholders.

A director is responsible to the Board of directors and can also be responsible, individually to shareholders.

Promoter directors and other directors:

So far contractual obligations and rights are concerned there is hardly any difference between a promoter director and other director. Promoter director can be from stage of incorporation of company. After incorporation, a director who hold substantial stake is considered a promoter director though he may not be involved while incorporation of company.

The difference is only due to position as a shareholder. A person holding or influencing majority of shareholders can be in a controlling position to change board of directors or any director.

Employment and employee conditions:

A person is employer and other is employee if the first person has employed the other for doing any work. There can be different type of rights and obligations as well different manner of exercising respective rights and discharging obligations. In case of company,  if company has appointed a person he is employee for the work for which he is employed. Even a director is employee may be in capacity of director or agent or officer. He is responsible to the company through the Board of directors and general meetings.

Directors also retire as per provisions of law and can be appointed or removed.

Irrespective of nature of contract and specific terms and conditions, director is accountable and has to report about work which he has done for and on behalf of company, he has to give account for the same and also for any property including funds used by him and obligations and liabilities incurred for and on behalf of company.

Even a promoter director is responsible to company just like any other director, officer or agent of company.   An action can also be brought against a promoter director, (just like against a non-promoter or ordinary director), by other directors, minority shareholders, concerned authorities, and people dealing with company.

Therefore, a director whether be a promoter director or other director is an agent or officer of company and is accountable to company.

Unless a director is employed by company, he has to attend only some of board meetings to continue as director. When a director devotes time for a company and work for company, there is a relationship- company is employer or principal and director is an agent or employee company.

Statutory definitions and general meanings:

We need to consider meaning of employer and employee as per statutory meaning, if any, applicable otherwise we need to consider the same as per general understanding. 

Usual terms and conditions as applicable in case of non-directors may not be applicable:

It is ground reality that   directors of company undertake more responsibilities and are in higher level of hierarchy in organisation. We find variation in terms and conditions even amongst various grades of   staff, junior managers, senior managers etc. For example, in many organisations different rules apply about attendance time, manner of recording attendance, leave rules etc. Directors are generally more resourceful and generally not dependent on monthly salary. Maintaining current account for directors is common practice. 

Case of Brahm Alloy Ltd:

This case relates to responsibility or liability of company to pay service tax under reverse charge mechanism (RCM) under the provisions of service tax. RCM is not applicable in case of payments made under an agreement which is for employment.

From reading of the judgment it appears that case required better representation and various points as discussed earlier in this write-up should have been pressed. It is true that monthly payments, some perquisites, and inclusion of terms and conditions for hiring  and  firing (for particular jobs and assignments given to director) could have strengthened the case. Honourable Tribunal has considered these conditions as essentials or prerequisites for contract of employment. Furthermore honourable Tribunal has presumed absence or lacking of these conditions. However, it cannot be assumed that these conditions were at all not existing, these conditions may be understood orally or trade practices and usages are applicable for such terms and conditions.

Directors are generally more resourceful than other employees. In case of other employees timely monthly payment is necessary because the cash inflow from salary is main source to meet monthly commitments, but that is not case, in case of a person who is director of company. In case of employee-director, particularly in case of closely held companies, it is common to maintain current account in which salary or remuneration is credited and payments are debited. Payments need not be at monthly periodicity.

In case of general employees, even ledger account is not maintained, salary is paid through salary register and any loans and advances are also recovered by way of deductions from salary which also find place in salary register. But that need not be a case in case of employee director. 

Learning from case and suggestions about director’s salary:

The employment can be for particular field of activities.

In employment letter duties and responsibilities can be defined.

Reporting clause should find place – the director shall periodically or as and when required report to the Board of directors or committee of directors or other directors.

Hiring and firing clauses can be added. In case director is unable to achieve results or the Board is not satisfied, then his assignment can be transferred to other officers.

Particular responsibilities and authority related to assignment can be withdrawn in some circumstances.

Names of directors can also be placed in payroll. In case there are several directors, a separate salary register can be maintained.

Depending on nature of employment, attendance or work records can be maintained.

Reporting to the Board can be formalized.


The judgment in case of Brahm Alloys Ltd (supra.) is reproduced below with highlights added for easy analysis and understanding.




By: CA DEV KUMAR KOTHARI - May 9, 2019



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