Professional services
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This article is written by Ronika Tater, a student at the University of Petroleum and Energy Studies, School of Law. This article discusses the provision of earlier Companies’ Acts and the new Companies’ Acts with various case laws and the role of professional service in relation to remuneration provided by a company.


The corporate world is full of specialization. The demand for professional specialization in the domain of corporate and securities laws has further specialized into Corporate Restructuring, Corporate Litigation, Takeover Code, Corporate Finance,  or any other relevant area. It is presumed after gaining practical exposure over a period of time, the professional gains “special knowledge” in a particular area and is known for his or her expertise in the corporate world. In a company, directors are appointed as professionals because of their expertise in a specific area. When a director is appointed in a company to perform certain duties which require special assignment to perform service in the form of a consultant, advisor, expert, specialist or practising professional. The provision of the Companies Act takes into account the appointment of a director, specialized professionals, and the company for companies’ success in the long run. 

What is Remuneration

The general meaning of remuneration is an amount of money paid in the form of reward, appreciation, compensation to an individual or somebody for the work assigned by him. Section 2(78) of the Companies Act, 2013 (Hereinafter referred to as “Act”) defines it as any money or its equivalent given or passed to any person for services provided by him and consists of perquisites as defined under the Income Tax Act, 1961. Consequently, any money paid in any form to a director of the company for services rendered by him will amount to remuneration or any benefit equivalent to money will be included in the remuneration of the directors.

Who is a Director

The Companies Act does not contain an exhaustive definition of the term director. However, Section 2(34) of the Act mentions that the director means a director appointed to the Board of a company. Section 2(10) of the Act defines that a board of directors or boards in the reference of a company means the collective body of the director of the company. A Board of Directors means a body established to direct, control and supervise the company affairs. As per Section 149 of the Act, the Board of Directors is individual only. Hence, nobody corporate, association or firm shall be appointed as a director. A director to the board may be defined as the first director, resident director, independent director, alternative director, woman director, small shareholder director, additional director, nominee director, and casual director. In the case of an independent director, remuneration should be rendered as per Section 149(9) of the Act and it precludes any stock option. Remuneration will be received by way of sitting fee, reimbursement of expenses for participation in the Board and other committee meetings, and profit as agreed by the members mentioned under Section 197(5) of the Act.


Remuneration payable by the Company to its Director

While paying remuneration it is pertinent to note the difference between employment and profession. If the services rendered by the director are of professional nature and not related to daily routine nature then he cannot be considered to be in the employment of a company the same is considered to be in the professional capacity. However, in case the director is appointed in employment by way of a binding agreement and the terms and conditions are abiding then he would be considered in the employment of a company. The following are the two categories in which remuneration is provided to its director:

  1. In the case of a private companySection 197 and Section 198 provides only managerial remuneration paid by a public company. Thus, any remuneration paid by a private company to its director shall not be included in this Section.
  2. In the case of a public company – Section 197 provides the total managerial remuneration paid by a public company to its directors consisting of managing directors, the whole time director shall not exceed 11 percent of the net profit of the company in any financial year. However, this limit can only be exceeded by the approval of the members of the company by an ordinary resolution as per Section 197(1) of the Act.

The remuneration paid to a director of the company will also include special services rendered by him. This means that in addition to directorial services, special services must also be inclusive in the total remuneration and within the limits of 11 percent as prescribed earlier. The company can approach the central government for its express opinion with regard to remuneration rendered to the director for its professional service in a company. Once the central government expresses its opinion that the director is qualified to be payable for the professional service then the previous provision of the central government is not required as the same is excluded from the total remuneration under Section 197 of the Act.

However, the exception is provided under Section 197(4) of the Act, when remuneration is paid for professional services rendered by a director to the company without any specified limit, the following condition needs to be satisfied to prevail the remuneration:

  • The services rendered should be of professional nature.
  • According to the Nomination and Remuneration Committee, the director shall possess the specialized qualification for the practice of the profession, if no such committee is constituted then the board can form its opinion.

Thus, to exclude the services rendered by the director or in any other capacity from the prescribed limit, it is necessary to satisfy the aforementioned conditions. Further, the Act neither defines the term profession nor services of professional nature. According to the Black’s Law Dictionary (5th Edition), “Profession” is defined as a vocation or occupation requiring special, advanced, education and skill. Nowadays vocations also require special knowledge rather than mere skill. Section 200 of the Act is with the reference to the professional qualification in relation to managerial remuneration.

Tax head under which the income is taxed under the Income Tax Act

In the case, Foseco India Ltd Pune v. Deputy Commissioner of Income Tax, 2017, it was held that no tax is required to be deducted under Section 194J of Income Tax Act out of director sitting fee for the financial year. In this case, remuneration rendered by the director for professional service was also discussed. Section 194J of the Act defines professional service as services rendered by a person in the course of following legal, medical, engineering or architectural professions or accountancy or technical or any other relevant profession as notified by the Board. It is mentioned under Section 194J(1) that no professional services are paid by the assessee’s sitting fee paid to the Director. The Finance Bill 2012 mentioned that there is no provision for deduction of tax on the remuneration payable to the director that is not in the nature of salary. The Finance Act, 2012 has inserted a new provision in order to clarify the doubt in Section 194J(1)(ba) which defines any remuneration or fees or commission called other than those mentioned under Section 192 of the Act, which states that tax is deductible to a director of a company at the applicable rate. In the case, Commissioner of Income Tax v. M/S Madhyanchal Vidyut Vitran Nigam Ltd, 2017, the same question was raised whether service was provided under Section 194 J of the Act in connection with electricity transmission.

Some landmark judgments on service rendered in any other capacity

The following are the cases in relation to remuneration to the director for rendering professional services. In the case, Ramaben A. Thanawala v. Jyoti Ltd, 1957 it was held by the Bombay High Court that Section 309 of the Companies Act, 1956 provides the cost of management and considered managerial remuneration and not remuneration paid for any other purpose. It is important to note why a company would appoint an expert instead of any regular employee and pay him according to his choice and yet the company is not allowed to use his technical knowledge and provide him with the right remuneration for its expertise. Further discussion with regard to Section 309 is seen in the case, R.Gac Electrodes Ltd. v. Union of India, 1982, it was held by the Kerala High Court that whether Section 310 of the Companies Act 1956, provides for the increase of remuneration for professional services. As per Section 309, the remuneration is paid to the director on services rendered by him in any other capacity, and for increasing the remuneration, permission is required under Section 310. As professional services are not considered to be remuneration under Section 309(1). Hence, remuneration payable for services of professional nature requires no previous sanction of the central government.

In the case of Ruby Mills Ltd. v. Union of India, 1984, the Bombay High Court held that the objective of the Companies Act is to regulate and control the working or the fees of qualified professionals. While considering the definition of remuneration it is essential to note that professionals’ fees and charges cannot be exempted from it otherwise, it will be unreasonable and absolute in its effect and may be a violation of constitutional rights, the right to freely practice any profession. In the case, Stup Consultants Ltd. v. Union of India, 1986, the High Court of Delhi stated that the respondents had not argued that a company has to seek the Central Administration’s opinion on possession of the necessary skills in Section 309(1). On any invocation, the Central Government must express its opinion and it cannot side-track by compliance with any other provision.

In Sree Gajanana Motor Transport Co. Ltd v. Union of India, 1991, the Karnataka High Court upheld the above submissions and stated that nothing in Section 309 of the Act envisages the power to the central government to restrict the remuneration payable to a director for rendering professional services. Also, the central government was ultra vires in fixing the upper limit on the fee payable to a professional for services of a professional nature rendered by a director of a company, while expressing its opinion once the central government is satisfied that the director concerned with the service possesses the requisite qualification to render the professional services, it is not allowed by the central government to put any stop on the remuneration rendered to a director for its professional services.

Applicability of Section 309 of the Companies Act, 1956

The provision is applicable to both the public companies and private limited companies, even the subsidiaries of public limited companies. Further, the non-executive directors that fall under the category of the super-specialized director will fall under the provision of Section 309(1) of the Act and any amount payable to the non-executive director for professional services will be included. Section 309 of the Act is independent and hence once compliance is necessary, however, with regard to listed companies it would be in accordance with Clause 49 (I)(B) of the Listing Agreement and the professional fees payable to non-executive directors for acquiring their professional services as a part of good corporate governance practice.


The Companies Act and the Income-tax Act provide the functions and taxability on director income. Most importantly emphasizing the point that the director should be remunerated as per their professional services as in the present scenario, specialization in a particular field of the area is the need of the hour. Hence, Section 309(1) of the Companies Act, 1956 and Section 197 of the Companies Act, 2013 plays a crucial role. The only critical part of this provision is that the express opinion of the Central Government is required in order to seek the requisite qualification of a Director.


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