1) It is to be noted that the RCM Notification no.13/2017-Central Tax (Rate) dated 28.06.2017 does not use the phrase ‘services provided by any person to a Company, who is a Director in the said Company’. Instead, it uses the phrase ‘services supplied by a Director of a Company’. Hence it is clear that the said notification covers only those services which are provided in the capacity of a Director.
2) It is specifically noted that the said GST notifications has emphasized the words ‘Director’s remuneration’ and it is abundantly clear that it covers the aspect of remuneration paid to a Director, in his capacity as a Director. This aspect also supports the view that the services which are provided in the capacity of a Director would only be covered under the reverse charge mechanism. The RCM notification does not appear to cover services which are provided in the independent capacity of the Director, as it would not form part of the remuneration paid to the Director in the said capacity. When the services are provided in the independent capacity of an individual, it cannot be said it is the Director who has provided the said services. The requirement to pay GST under RCM would arise only when it is provided in the capacity of a Director.
3) When a director of the company has expertise skills or technical knowledge regarding a particular field, his services provided to the company cannot be put under RCM in the hands of the company basis that he is not providing such services to the company as ‘Director’ but as a ‘skilled professional’.
4) The GST law highlights only two capacities of the director, one as an employee and other as a director. However, there may be third capacity i.e. personal capacity over which director could render certain services to his company which may be totally different from the directorial capacity. Few examples could be:-
- Renting of premises by director
- Guarantee given by the director in lieu of guarantee commission
- Other professional and technical services.
5) In the matter of Suessen textiles bearings Ltd., it was held that guarantee commission is a commission for risk bearing and nothing to do with the directorship.
6) Only those services will be covered under this head which are provided by the director in the capacity of a director and not otherwise. A director who has rented his office to the company and draws lease rentals will be required to pay tax in his individual capacity and the company will not be required to pay tax on the same under RCM.
7) Also the Company Act 2013, section 197(4) says that, – if a director is having requisite qualification/experience as per Nomination and Remuneration Committee/Boards of Director and these services are rendered in individual capacity, then such payments are not considered a part of remuneration of max permissible remuneration under the act, even TDS is deducted under section 194J of the act. Hence, such services are considered to be rendered under his personal capacity instead of directorial/employee capacity.
8) In simply saying, if CONTRACT OF SERVICE, then there would be no GST liability. In case of CONTRACT FOR SERVICE in directorial capacity- reverse charge mechanism would apply. Whereas in the present case, there is contract with between the person having technical expertise and skills (despite being director of the company) and the company, then it is referred as Contract OF service, therefore, reverse charge mechanism in the hands of the company would not arise even if TDS has been deducted under section 194J of the said act.
9) Hence, where there is contract OF service, regarding specific technical expertise/skill and consideration is received by the person (director of the company) as remuneration or commission towards specific services provided by him to the company is outside the ambit of Reverse charge mechanism under GST.
10) Moreover, a director who has taken an employment in the company may be functioning in dual capacity, one as a director (skilled professional working as an individual capacity) and the other on the basis of the contractual relationship of master and servant with the company (employment), then as per circular No. 140/10/2020 dt.10.06.2020, then only part of employee director’s remuneration which is declared separately as ‘salaries’ in the company’s account and subjected to TDS under section 192 of the said Act will be considered within ambit of Schedule III of the CGST Act, 2017 and would not be chargeable to reverse charge. On the other part (working individual capacity as skilled professional), reverse charge mechanism would not be attracted in the hands of the company even if TDS has been deducted under Section 194J of the said Act.
DISCUSSION ON OTHER SERVICES
- Taxability of IPR under indirect tax laws has always been surrounded by ambiguous interpretation in relation to its transfer from its owner. Prior to GST regime, there was a persistent struggle regarding the treatment of transfer of IPR for the purpose of tax liability, whether to treat it as ‘goods’ or ‘services’. The union government had right to levy service tax on transactions relating to IPR if the same were classified as services, while the state governments had the right to sales tax / value added tax if the transaction involving IPR was treated as sale or deemed sale of goods.
- Payments of Royalty are not insisted as payment for a service provided. It is understood as a share of product or profit received by the owner for permitting another the use of his property. Royalty payments in the present case for the use of technology and know- how cannot be equated with any service to be provided by the Service Provider. Similarly, in the instant case the payment received by the brand owner on a percentage basis, cannot be treated as a payment for providing the taxable service, since providing of technical assistance by the owner to their service recipient cannot be equated to the provision of taxable services.
- To tax under service tax, under Intellectual property Rights, such rights should be registered with Trademark/ Patent authorities. It is a fact on record that such trade mark is not registered in India. The taxable service include only such Intellectual Property Rights except Copyright that are prescribed under the law for the time being in force, as the term ‘time being in force’ implies that, as are applicable in India, and Intellectual property rights covered under Indian Law in force alone are chargeable to tax and Intellectual Property Rights would not cover under the taxable supply. Admittedly, Trade Marks have been used by the assessee are not registered in India, therefore, the same are not liable to tax under IPR service.
- To be categorized for tax purpose under IPR, such right should have been registered with trade mark / patent authority. In the present case, admittedly, there is no right recognized as IPR under any law for the time being in force in India. As such, there can be no provision of IPR service for tax liability on reverse charge basis.
- Similarly in GST era, in the press release issued by the Ministry of Finance, the phrase “registered brand name” in terms of the GST Notification means brand name or trade name registered under the Trade Marks Act, 1999. Hence, there has arisen a situation wherein supply from a particular company selling for example pulses under a brand name which is not registered would be exempted from GST.
- There is also paradoxical situation in many spheres as for transfer of IPR in respect of IT software, wherein it is treated as goods and services both. Permanent transfer of IPR is treated of IPR is treated as supply of goods. Permanent transfer of an IPR is considered as supply of goods and is leviable to GST @ 12% provided such IPR is not in relation to IT software in terms of Notification No. 41/2017-CT (Rate), dated 14.11.2017. Since permanent transfer of IPR has been treated as goods and services under GST laws, the point of contention is whether permanent transfer of IPR is covered under heading 99733 to scheme of classification of services or serial No. 243/ Serial No. 452P to scheme of classification of goods. Heading 99733 to scheme of classification of services provides for permitting, granting, or authorizing the use of intellectual property products wherein license is granted by the supplier to the recipient to use IPR.
- In view of the above and considering how the GST law stands as of now, there are certainly some areas where further clarity is required on the taxability of IPRs and there is a need to bridge the loopholes in the tax provisions. The ambiguity still persists as prior to GST era.
Royalty for using Brand name
1. A franchise agreement is a legally binding agreement by which the franchiser allows the use of certain intellectual property rights to the franchisee in return for consideration. These agreements are very commonly used to scale business models.
2. While the GST Acts have not defined “franchise”, the definition from the Finance Act, 1994 can be borrowed. The Act states that a franchise refers to ”an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with the franchisor, whether or not a trademark, service mark, trade name or logo or any such symbol, as the case may be, is involved.”
3. It is arguable that since the franchise agreements required the transfer of assets (brand name) for setting up the business, hence it was a situation of transfer of business assets and not taxable supply of goods under GST. Transfer of business assets refers to a situation of transfer of a business means the transfer of a distinct business vertical and not the same vertical of which a certain portion has been transferred to another entity. Such transfers are exempt from GST.
Conclusion
From all above points it is clear that in case of directors in individual capacity is not liable to paid GST under RCM on Director’s Services. The schedule III of the CGST act has spelt out the activities which are neither supply of goods nor services. Such activities are not under the scope of GST. ‘Services by an employee to the employer in the course of his employment’ is one among them. This means payments made to an employee by his/her employer as per the employment agreement will not attract GST.
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Authors: Adv. Dinesh Verma | Adv. Sagar Verma
Disclaimer: Though all efforts have been made to reproduce the opinion correctly, the access and circulation is subject to the condition that I/we am/are not responsible/ liable for any loss or damage caused to anyone due to any mistake/error/omissions. Our comments are based on the provisions of GST legislation as on the date of this memo. Any variation in our understanding of the aforesaid could significantly alter our comments given in this note. The comments in this memo are purely a matter of interpretation and not binding on any regulatory or tax authorities. Therefore, there can be no assurance that the regulatory or tax authorities will not take a position contrary to our comments. Our opinions are provided for general informational purposes only and should not be considered as legal advice. The interpretation and application of the GST Act may vary based on individual circumstances and specific cases.
Author Bio
The article seems to emphasise that sr. no.6 of the RCM Notification no.13/2017 CT(R) dt.28.6.17, as amended, does not seem to cover services supplied by a Director, in his individual capacity.
Sr.no. 6 of the said notification prescribes GST liability under RCM iro supply of services by a Director, on the company or body corporate located in the taxable territory, as under-
“ Services supplied by a director of a company or a body corporate to the said company or the body corporate.”
The above provision in the GST era is similar to the provision in the S. Tax era iro S Tax under RCM on a Director of a Company. Sr. no. 5A of Notification No. 30/2012-ST dated 20.6.2012, as amended, similarly prescribes that “in respect of services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate”, full s. tax shall be paid by the recipient of service i.e. the company or the body corporate, as the case may be, under RCM.
As could be seen from the provisions in GST and S.Tax, the onus of discharging tax in respect of the said services supplied/provided or to be provided by the Director is on the company or the body corporate, as may be the case, under RCM basis.
Coming back to the issue of discharging tax under RCM on the aspect of individual capacity, as is the emphasis of the article, it could be seen that similar ratio has been laid down by Cestat, New Delhi on 12.4.2023, in the case of Cords Cable Industries Ltd. [S.Tax Appeal No.52207 of 2018].
In the said case, two of the Directors had rented out their premises to the company for being used as Regd office/ Corporate office. The invoices raised by the Directors charged stax on the rent amount payable to them. However, a SCN was issued demanding stax from the company on the rent amount under RCM. In the said case, it was held as under-
“The premises which were let out to the appellant are owned by Naveen Sawhney and D.K. Prashar in their individual capacity and it is not the case of the department that the properties were owned by them as Directors of the appellant. In such a situation, rent was collected by them in their individual capacity and merely because they also happen to be the Directors of the appellant would not mean that they had collected rent as Directors of the appellant.”
The ratio of the above decision would be applicable in the GST era too, as there is no difference in the wordings of the said notifications issued under S Tax and GST.
The wordings of the notification no.13/2017 speaks of GST liability under RCM on “SERVICES SUPPLIED BY A DIRECTOR OF A COMPANY”. Literally, plain reading of the said wordings would mean ‘any services supplied by a Director of a Company’. No condition could be said to be attached to the type of services supplied by a director. Reference may be had to Circular no.140/10/2020 dated 10.6.2020, which, while clarifying as to whether GST is leviable on Director’s remuneration paid by companies to their directors’ vis a vis the implication of the entry in Schedule-III i.e. “services by an employee to the employer in the course of or in relation to his employment”, clarified vide, para 5.4 of the said Circular as under-
“5.4 It is further clarified that the part of employee Director’s remuneration which is declared separately other than ‘salaries’ in the Company’s accounts and subjected to TDS under Section 194J of the IT Act as Fees for professional or Technical Services shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable. Further, in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.”
From the above clarification, it could be seen that no distinction has been made wrt the Technical and Professional services being provided by the Director. The gist of the circular is that any remuneration received by the Director and which is declared separately as ‘other than salaries’ by the Company and subjected to TDS, for services supplied to the company would be liable to GST under RCM.
However, the ratio of the said Cestat decision and the emphasis in the article seems to suggest that the wordings “services supplied by a Director of a Company” should be read as “services supplied by a Director of a Company, other than that supplied in his individual capacity”.
The scope of services falling under the category of ‘Services other than that supplied in the individual capacity’ to fit under the RCM category, as suggested, would be very limited. For eg. ‘Sitting Fee’ (which incidentally being not in the nature of salary payment is liable for TDS deduction) or some other services which they have been specifically directed to perform as Director of the Company. If the intention of the legislature was to bring only such services within the ambit of RCM, then the wordings could have been more specific, like- “services supplied by a Director of a Company, like Sitting fee, etc.”
In my humble opinion, the wordings of the said notification leave no scope for bringing into any conditions attached to the nature of services supplied by a Director of a Company. The wordings of the said notification are clear, plain and unambiguous. It is a well settled principle of law that when the words in the statute are clear, plain and unambiguous and only one meaning can be inferred, the Courts are bound to give effect to the said meaning irrespective of consequences. If the words in the statute are plain and unambiguous, it becomes necessary to expound those words in their natural and ordinary sense. The words used declare the intention of the legislature. In Kanai LaL Sur v. Paramnidhi Sadhukhan, AIR 1957 SC 907, it was held that if the words used are capable of one construction only then it would not be open to the Courts to adopt any other hypothetical construction on the ground that such construction is more consistent with the alleged object and policy of the Act. [2018(361)ELT 577 (SC)- CC (IMPORT), MUMBAI VS. DILIP KUMAR & CO.]. In the Cestat decision, they have tried to give a different construction to the wordings of ‘services supplied by a director’ by making it conditional, probably inferring that such was the intention of the legislature. Even if that would have been the intention of legislature as is the ratio laid down in the said decision, the wordings of the said notification need to be appropriately amended to be it in sync with the intent of the legislature.
It will also be of relevance and interest to see if the department prefers an appeal against the said Cestat decision in the case of Cords Cable Inds Ltd.