TaxTMI 
TaxTMI 
09 Sep 2026 
The Capacity in Which a Director Acts Makes the Difference
The taxability of remuneration paid by a company to its directors often leads to disputes because a director may occupy more than one legal capacity. A person may sit on the Board as a director and, at the same time, serve the company as an employee. The tax consequence cannot therefore be determined merely by the designation "director". What matters is the real character of the relationship in which the remuneration is paid.
The recent decision of the Allahabad Bench of the Customs, Excise & Service Tax Appellate Tribunal in M/s CPS Security Private Limited Versus Commissioner, Central Goods & Service Tax, Noida - 2026 (9) TMI 345 - CESTAT ALLAHABAD , brings this distinction into sharp focus. The Tribunal held that where monthly remuneration paid to directors is accounted for as salary, subjected to TDS as salary, and also offered by the directors to income tax under the head "Salary", it cannot be treated as consideration for a taxable service. The decision is equally important on two other issues: determining taxable value from unreconciled financial data and invoking the extended period merely because returns were not filed or discrepancies appeared in Form 26AS.
The judgment was rendered under the Service Tax regime, but its reasoning on directors' remuneration has direct relevance under GST. In fact, CBIC Circular No. 140/10/2020-GST dated 10.06.2020 substantially reflects the same distinction between remuneration arising from an employer-employee relationship and remuneration for services rendered independently as a director. The judgment therefore provides a useful bridge between the Service Tax position and the present GST framework.
The Dispute Began with Form 26AS, Not with Any Independent Evidence of Suppression
M/s CPS Security Private Limited was engaged in providing Security Agency/Manpower Supply Services and was registered with the Service Tax Department. The proceedings arose from third-party information obtained through the data-exchange mechanism with the Income Tax Department. On examining Form 26AS, the Service Tax Department found that, for the period from October 2014 to June 2017, the company had not discharged Service Tax on its entire receipts. The Service Tax Department issued a show-cause notice on 29.09.2020.
The adjudicating authority treated gross receipts of Rs. 3,25,92,597 as the total taxable value and confirmed Service Tax of Rs. 49,38,552, apart from interest, an equivalent penalty under Section 78, other penalties and late fee. An important component of the taxable value was the monthly remuneration paid by the company to its directors. The company maintained that this remuneration represented salary for services rendered by the directors as employees and could not form part of the taxable value.
The first appeal was initially dismissed on limitation. The Tribunal thereafter remanded the matter to the Commissioner (Appeals), who, by order dated 30.01.2026, rejected the appeal on merits and upheld the adjudication order. The assessee consequently approached the Tribunal once again.
A Director Can Also Be an Employee - Designation Does Not Decide Taxability
The central issue was whether remuneration paid to the directors could be brought within the Service Tax net merely because the recipients were directors of the company. The assessee's case rested on how the payments were actually treated. The remuneration was paid monthly and accounted for as salary in the books of account. TDS was deducted under the salary provisions of the Income Tax Act and reflected in Form 16. The directors, in turn, disclosed the amounts in their individual income-tax returns under the head "Salary".
These facts were significant because Section 65B(44) of the Finance Act, 1994 defined "service", and clause (b) specifically excluded a provision of service by an employee to the employer in the course of or in relation to employment. Once the remuneration represented payment under an employer-employee relationship, the activity itself fell outside the statutory definition of service.
The Tribunal accordingly accepted that remuneration paid in the form of salary could not be treated as consideration for a taxable service. The decisive factor was therefore not the office of directorship in isolation but the capacity in which the director rendered the relevant services and received the remuneration.
Salary Does Not Become Consideration for a Service Merely Because the Employee Is a Director
The importance of the ruling lies in separating a person's status from the character of the payment made to that person. A director may perform functions in different capacities. Where the evidence establishes that the company has engaged the director as an employee and the remuneration represents salary for duties performed under that employment relationship, the payment retains its character as salary.
The Tribunal attached importance to the consistent documentary treatment adopted by both sides. The company had recorded the remuneration as salary and deducted TDS accordingly, while the directors had themselves declared the income as salary. The judgment therefore does not rest merely on the description given to the payment in one document; rather, the accounting records, tax deduction and income-tax treatment collectively supported the existence of an employer-employee relationship.
This distinction is important in practice. The ruling should not be read as laying down that every payment to every director is salary. Its principle is narrower and stronger: where the facts establish an employer-employee relationship, and the particular remuneration is salary for services rendered in that capacity, the payment cannot be re-characterised as consideration for an independent taxable service merely because the employee also holds the office of director.
Form 26AS May Reveal a Difference - It Does Not Determine Taxable Turnover
A second important aspect of the judgment concerns the manner in which the Service Tax demand was computed. For Financial Year 2016-17, the adjudicating authority adopted the turnover appearing in the Balance Sheet. For other periods-October 2014 to March 2015, Financial Year 2015-16 and Financial Year 2017-18-the figures appearing in Form 26AS were taken as the basis of the demand. Yet no reconciliation was carried out between these different sources.
The Tribunal found this approach unsustainable. Taxable value has to be determined by examining the actual taxable services and the consideration attributable to them. Financial statements and Form 26AS may provide useful information and may legitimately trigger scrutiny, but they cannot automatically substitute for the statutory exercise of determining taxable value. A difference between two financial records requires reconciliation and verification, not an automatic measure of tax liability.
In this context, the Tribunal referred to Firm Foundations & Housing Pvt. Ltd. Versus Principal Commissioner, Office of the Principal Commissioner of Service Tax - 2018 (4) TMI 613 - MADRAS HIGH COURT, and M/s Sigma Trade Wings Versus Commissioner, Central Excise & Service Tax, Lucknow - 2019 (3) TMI 36 - CESTAT ALLAHABAD. The Tribunal emphasised that a demand could not be sustained merely by selectively drawing figures from different financial sources without reconciling them.
Financial Discrepancy Is a Starting Point for Enquiry, Not Proof of Tax Evasion
This part of the ruling has significance beyond directors' remuneration. Tax administrations increasingly rely on information from income-tax records, financial statements and third-party databases. Such information can reveal discrepancies and justify investigation. But a discrepancy is not synonymous with taxable turnover, just as information appearing in Form 26AS does not necessarily establish that the entire amount represents consideration for taxable services during the relevant period.
Differences may arise in the timing of recognition, accounting treatment, or the nature of the underlying receipt. Some amounts may not represent taxable consideration at all. Therefore, before confirming a demand, the Department must reconcile the information with the assessee's books and determine the nature of the underlying transactions.
The broader principle is straightforward: third-party data may identify a possible tax difference, but the tax liability must still be established under the charging and valuation provisions of the tax law. Electronic or financial data can trigger enquiry; it cannot replace adjudication.
Extended Limitation Cannot Be Built Merely on Non-Filing of Returns
The third, perhaps equally important, issue concerned limitation. The show-cause notice dated 29.09.2020 covered the period from October 2014 to June 2017. The demand was therefore sought to be sustained for the extended period under the proviso to Section 73(1) of the Finance Act, 1994. The Department principally relied on the assessee's failure to file ST-3 returns and on discrepancies between the Balance Sheet, Profit & Loss Account, and Form 26AS.
The Tribunal rejected this reasoning. The company had maintained regular books of account and statutory records in the ordinary course of business. The information contained in those records was available for scrutiny. More importantly, the Department had not produced corroborative evidence showing deliberate suppression of facts with an intention to evade Service Tax. The mere existence of discrepancies in financial records could not establish the culpable conduct necessary to invoke the longer period.
The ruling therefore reinforces an important distinction between a tax default and the ingredients necessary for extended limitation. Even where tax may otherwise be payable, the longer limitation period does not automatically follow. The statutory conditions permitting the Department to travel beyond the normal limitation period must be independently established.
Suppression Must Be Wilful - Mere Omission Is Not Enough
In reaching its conclusion, the Tribunal relied on M/s International Air Charter Versus Commissioner of Central Tax (Appeals – II), Delhi - 2023 (12) TMI 1004 - CESTAT NEW DELHI, which examined settled Supreme Court jurisprudence on "suppression of facts". The line of authority included PUSHPAM PHARMACEUTICALS COMPANY Versus COLLECTOR OF C. EX., BOMBAY - 1995 (3) TMI 100 - Supreme Court; ANAND NISHIKAWA CO. LTD. Versus COMMISSIONER OF CENTRAL EXCISE, MEERUT - 2005 (9) TMI 331 - Supreme Court; and M/s. UNIWORTH TEXTILES LTD. Versus COMMISSIONER OF CENTRAL EXCISE. RAIPUR - 2013 (1) TMI 616 - Supreme Court.
The settled principle emerging from these decisions is that "suppression of facts" under an extended limitation provision must be construed strictly. Not every omission amounts to suppression. There must be something more-conduct showing that material information was deliberately withheld with the requisite intention to evade tax. The Supreme Court jurisprudence relied on by the Tribunal makes a deliberate or positive act central to invoking extended limitation.
Accordingly, mere non-filing of ST-3 returns did not, by itself, establish wilful suppression. Nor could the Department convert differences found in the assessee's financial records into evidence of an intention to evade tax. The Tribunal ultimately found the entire demand unsustainable on limitation grounds and set aside the impugned order, allowing the appeal with consequential relief.
Author's Note - The Ruling Fits Squarely into the GST Framework on Directors' Remuneration
Although the judgment was rendered under Service Tax law, its reasoning on directors' remuneration has considerable significance under GST. Paragraph 1 of Schedule III to the CGST Act, 2017 provides that services rendered by an employee to the employer in the course of or in relation to his employment are neither a supply of goods nor a supply of services. The underlying statutory principle is therefore substantially similar to the exclusion that operated under Section 65B(44)(b) of the Finance Act, 1994.
More importantly, CBIC Circular No. 140/10/2020-GST dated 10.06.2020 provides direct administrative clarification on this very issue. The Circular distinguishes between independent directors or other directors who are not employees of the company and directors who are also employees. Remuneration paid to independent directors and other non-employee directors is outside Schedule III and is taxable in the hands of the company under reverse charge in terms of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017.
However, where a director is also an employee, the Circular recognises that the same person may function in dual capacities. It therefore requires an examination of whether the particular activity is performed under a "contract of service", reflecting an employer-employee relationship, or under a "contract for service". Significantly, the Circular itself draws support from the income-tax treatment of the remuneration. Where the remuneration is declared as "salary" in the company's books and subjected to TDS under Section 192 of the Income Tax Act, 1961, it is treated as consideration for services by an employee to the employer and is consequently outside GST by virtue of Schedule III. Conversely, remuneration separately treated as professional fees and subjected to TDS under Section 194J falls outside the employment exclusion and attracts GST under reverse charge.
In this background, the CESTAT ruling and Circular No. 140/10/2020-GST substantially converge on the same principle: the designation "director" does not determine taxability; the capacity in which the services are rendered and remuneration is received does. The judgment is particularly useful because the factual indicators accepted by the Tribunal-treatment as salary in the company's books, deduction of TDS as salary, issuance of Form 16 and corresponding disclosure by the directors in their income-tax returns-are closely aligned with the tests recognised by the CBIC Circular. At the same time, the Circular cautions against treating the matter as an all-or-nothing classification of the individual. An employee-director may have different components of remuneration arising in different capacities, and each component must therefore be examined according to its true character.
The Limitation Principle Also Travels Beyond the Service Tax Regime
The ruling is also relevant under GST on extended limitation. A tax discrepancy, non-payment or return default may justify enquiry, but cannot by itself establish fraud, wilful misstatement or suppression with intent to evade tax. This principle now finds further support in the recent Supreme Court decisions in M/s G.R. Infra Projects Limited Ratlam Versus The State of Madhya Pradesh & Ors. - 2026 (8) TMI 1497 - SC Order, and M/s. Tata Steel Limited Versus Union of India through the Secretary Ministry of Finance and Ors. - 2026 (8) TMI 1587 - Supreme Court , which reinforce that invocation of Section 74 of the CGST Act, 2017 requires a specific factual foundation establishing the culpable conduct contemplated by the provision.
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