Overview of a Director’s status

A Director has a special status and powers to carry on the business of a company. Directors are on the top of the managerial hierarchy of the company. Such powers have been conferred on them by the statute i.e the Companies Act, 2013 itself. A company is a legal entity but it cannot conduct business by itself and hence needs to appoint working limbs on its behalf to carry on the business in a prudent manner and perform important managerial functions. As such, Directors are entrusted with the overall supervision and direction of the management and administration of the business. The term “Director” itself is wide and encompasses the job of the Employees in it. As such, a Director can be an employee but an employee cannot be a Director necessarily.  Directorship itself is of wide import includes various designations of Directors.

Role of Directors as entrusted Employee

A Whole Time Director is the one who is in whole time employment of the company as per section- 2      (94) Companies Act, 2013 which clarifies the stand that a Director is the person necessarily in the employment of the company. This way the legislators have themselves recognized the status of the Director in the administration of a company.

In case of an Executive Director or Managing Director, since he is also engaged full time in a company, the salary paid to him is a consideration of his skill and endeavors employed in the service of the company and is paid to him in the ordinary course of business and on regular basis like other employees of the company. The same contention has been provided in the case of Anil Kumar Agarwal (ruling of AAR Karnataka dated 4-5-2020) wherein it has been pronounced that on salary paid to an Executive Director, the company need not pay GST on reverse charge basis but need to pay GST on salary paid to a Non-executive director.

An MD/ED and a WTD plays dual role in an organization i.e of employee and Director. [ESI Corp. vs. Appex Engg. P Ltd (Del)]. The Director acts as an agent of the company due to his sovereign status accorded by the law to takes major decisions and call the shots on behalf of the company and runs the affairs of the company and obtains the remuneration for his active and dedicated involvement as an employee hired by the company. This proposition has also been affirmed in the case of Light of Asia Insurance Co. Ltd.: Governor-General in council and Ars. Vs. Shailendra Mitra and Ars. By Calcutta High Court as under:

Though an agent as such is not a servant, a servant is generally for some purposes his master’s implied agent, the extent of the agency depending upon the duties or position of the servant. It is again true that a director of a company is not a servant but an agent inasmuch as the company cannot act in its own person but has only to act through directors who qua the company have the relationship of an agent to its capacity. A managing director may have a dual capacity. He may both be a director as well as an employee. It is, therefore, evident that in the capacity of a managing director he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee, or an agent depending upon the nature of his work and the terms of his employment. Where he is so employed, the relationship between him as the managing director and the company may be similar to a person who is employed as a servant or an agent, for the term employee is facile enough to cover any of these relationships. The nature of his employment may be determined by the articles of association of a company and/or the agreement, if any, under which a contractual relationship between the director and the company has been brought about, whereunder the director is constituted an employee of the company, if such be the case, his remuneration will be assessable as salary under section 7. In other words, whether or not a managing director is a servant of the company apart from his being a director can only be determined by the articles of association and the terms of his employment.

Dominance of Company over acts of Directors

The Directors have to work within the contours of legal framework surrounding the composition of the company. This fact gets reflected in the fact that the Directors cannot work outside that legal framework i.e they cannot act bypassing the Act, Rules, Memorandum and Articles etc. to their personal gain and any such act becomes void ab initio if done by Directors even if done inadvertently. Therefore, the company being a legal entity maintains an upper hand over the acts of Directors despite of bestowing on them the greater powers of management as an employer does while controlling the conduct of the employees.

Remuneration to Directors is nothing but salary for rendering of services:

As far as the payment of remuneration to a Director is concerned he is not offering any specific independent services to the company but working as an ordinary employee in the ordinary course of business and gets the salary regularly like ordinary employees. Besides, their remuneration is also subject to TDS deduction as per income tax act provisions which further substantiate the contractual arrangement between the Director and the company which is implied but concrete. Besides, this arrangement being that of employer and employee is out of purview pursuant to provisions of Schedule-III of the CGST Act, 2016.the dual role played by the Director has also been appreciated in the ratio of Hindustan Vacuum Glass Ltd. Vs. Union of India 1981, Tax LR 2438 (Del).

Therefore, it is clear from the above elucidation that a Director albeit superior in management ranking is primarily employee of the company and is entrusted with wider powers only to manage the affairs on behalf of the company in an efficient manner. For this service he gets paid a remuneration which is paid to him like an employee. As such, there is an employer-employee relationship between the company and a Director due to which this payment is not liable to GST as provided in Schedule-III of the CGST Act, 2017.

The Same matter has been discussed by AAR-Karnataka affirming our above contentions providing that if the TDS on Director’s Salary is being deducted u/s 192  and he is Executive Director and not Nominee etc. the payment thereof shall be covered under Sch-III of CGST Act, 2017 and shall not be liable to GST  and if this is not the case, such payment to the Directors shall be liable to GST under reverse charge in the hands of the company.

Finally the matter has been put to rest by the Circular issued  by CBIC (No. 140/10/2020 Dtd. 10-06-2020) putting a stamp of confirmation over the above justifications and asserting the facts mentioned in the case of AAR-Karnatak (Supra).

Author Bio

Join Taxguru’s Network for Latest updates on Income Tax, GST, Company Law, Corporate Laws and other related subjects.

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Telegram

taxguru on telegram GROUP LINK

Download our App

  

More Under Goods and Services Tax

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

March 2024
M T W T F S S
 123
45678910
11121314151617
18192021222324
25262728293031