As per Serial No. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017, services supplied by a Director of a company or a body corporate to the said company or the body corporate is liable to tax under reverse charge. Thus, the company or a body corporate located in the taxable territory, being recipient of service is liable to pay tax under reverse charge.
In the above background, it pertinent to note that there can be various services which can be provided by the Director to the company and for which the payment is made by company. Some of the examples are;
Now, the question arises whether the above services provided by the director would be treated as supply and consequently the payment made by company would be liable to tax under reverse charge?
Judicial Rulings claiming all payments paid to director are liable to RCM
Recently, in Re: M/s. Alcon Consulting Engineers (India) Pvt. Ltd. [2019 (10) TMI 793] – Authority for Advance Ruling, Karnataka observed and held that the remuneration to the Directors paid by the applicant are not covered under clause (1) of the Schedule III to the CGST Act, 2017, as the Director is not the employee of the Company. The consideration paid to the Director is in relation to the services provided by the Director to the Company and the recipient of such service is the Company as per clause (93) of section 2 of the CGST Act and the supplier of such service is the Director.
Since the applicant is the company and is located in the taxable territory and the Directors’ remuneration is paid for the services supplied by the Director to the applicant company and hence the same is liable to tax under reverse charge basis under section 9(3) of the CGST Act, 2017.
Further, again in the case of M/s Clay Craft India Private Limited [RAJ/AAR/2019-20/33], the advance ruling authority for Rajasthan uphold the above view.
However, it may be noted that in both the aforementioned advance rulings the ld. AAR without specifically disproving the submissions and contentions of the applicant held that Directors are not employees of the Company and GST should be paid under reverse charge on any payment to the directors.
In a contradictory ruling in the case of M/s. ANIL KUMAR AGRAWAL [2020 (5) TMI 221], Advance Ruling Authority of Karnataka, has classified the payments received as Director into two parts. It states that;
“Two possibilities may arise with regard to the instant issue of amount received by the applicant. The first possibility that the applicant is the employee of the said company (Executive Director), in which case the services of the applicant as an employee to the employer are neither treated as supply of goods nor as supply of services, in terms of Schedule III of CGST Act 2017.
The second possibility that the applicant is the nominated director (Non-Executive Director) of the company and provides the services to the said company. In this case the remuneration paid by the company is exigible to GST in the hands of the company under reverse charge mechanism under section 9(3) of the CGST Act 2017, under entry no. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017.
In the instant case the applicant has not furnished any documentary evidence such as copy of agreement between the applicant and the said private company, copy of appointment order, details of ESI, PF deductions etc., so as to decide whether the applicant is in receipt of salary as an employee or as an independent director. Thus, in the absence of any documentary evidence, it is not possible to decide whether the amount received by the applicant is towards his services as an Executive Director or a Non-Executive Director.
In view of the above, the remuneration received by the applicant as Executive Director is not includable in the aggregate turnover, as it is the value of the services supplied by the applicant being an employee. Further, if the applicant receives the remuneration as a Non-Executive Director, such remuneration is liable to tax under reverse charge mechanism under section 9(3) of the CGST Act 2017, in the hands of the company, under entry no. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017. Thus, the value of the said services of the applicant being a Non-Executive Director are includable in the aggregate turnover, as it is the value of the taxable services supplied by the applicant, though the tax is discharged by the private limited company, under reverse charge mechanism”.
Who is an Employee?
As the services provided by an employee to the employer in the course of or in relation to his employment are not treated as ‘supply’ as per Schedule III to CGST Act, 2017. It is important to understand the term ‘employee’.
The term ‘employee; has not been defined under the GST Law. However, there are various labour law legislations which define the term ‘employee’ like Factory Act, Employee Provident Fund Act, Employees Estate Insurance Act etc. The definition of employee as provided in these Acts may not be applicable in the GST Law as given with reference to the particular Act. Generally, in order to have an employer and employee relationship, the employer shall exercise absolute and effective control over the employee, not only the sufficient control. The several factors which may be considered for determining the relationship of employer and employee can be:
Judicial Pronouncements on Employee-Employer Relationship
Many of these factors shall be applied together in order to determine employer and employee relationship. The employer and employee relationship has been analyzed by the courts at various occasions.
In the case of Brahm Alloy Limited v Commissioner of CGST & C. Ex., Durgapur [2019 (4) TMI 1537 – Cestat Kolkata], it was held as under:
“It is my considered view that to establish the employer-employee relationship for the purposes of the remuneration/salary, the Resolution of the company should cover both, “the terms of appointment/hiring of the services of the individual and similarly it should also cover that in case of non-performance of the specified duties, the individual shall be fired and/or his appointment would be terminated”. In short, to establish the employer-employee relationship, the clause of hiring and firing are an essential ingredient without which it cannot be construed whether the individual is the Promoter/Director or an employee Director.”
Different types of Directors & their Roles
There are different kinds of directors that a company can appoint. Broadly they can be divided into two categories – executive directors and non- executive directors. Executive directors are the ones who basically are involved in the day to day execution of the affairs of the Company and include whole time directors, managing directors, etc. whereas non-executive directors include independent director, nominee director etc. The executive directors of a company receive remuneration and may be considered in full time employment of the company.
The non-executive directors are generally the ones who are professionally involved merely in broad business of the Company and do not involve into the day to day activities. These non-executive directors attend the board meetings and receive sitting fees or commission for providing services to the company or body corporate.
Legal position in Erstwhile Service Tax Regime
The similar entry was also covered under reverse charge under service tax regime. The CBIC (the CBEC) vide Letter No. F. No 354/127/2012-TRU dated 27-07-2012 in para 7 clarified as follows in this regard:
7. Services of a director on the board of a company have now become taxable. A director may be appointed either in an individual capacity or to represent an entity (including government) who has either invested in the company or is otherwise authorized to nominate a director. When a director receives payment in his personal capacity, the same is liable to be taxed in the hands of the director. However, where the fee is charged by the entity appointing the director and is paid to such entity, the services shall be deemed to be supplied by such an entity and not by the individual director. Thus, in the case of Govt. nominees, the services shall be deemed to be provided by the Govt. and liable to be taxed under the exclusion sub- (iv) of clause (a) of section 66D of the Finance Act, 1994 i.e. support services by Government to business. Such services are liable to be taxed on reverse charge basis.
Thus, basis above, since the service provided by director in his personal capacity, the director remuneration paid by company should not be liable to tax under reverse charge. It would be treated as part of employment contract.
Further, CBIC (then CBEC) issued Circular No. 115/09/2009 – ST dated 31-07-2009, whereby it was clarified in para 3 that remunerations paid to Managing Director / Directors of companies whether whole-time or independent when being compensated for their performance as Managing Director/Directors would not be liable to service tax.
Furthermore, in the case of M/s. Allied Blenders and Distillers Pvt. Ltd. Vs. CCE, Aurangabad [2019 (1) TMI 433] – Cestat Mumbai observed and held that the Appellant have placed on record the Form-16 issued by the appellant indicating deduction of income tax at source on the salary paid to each of the Directors. Besides, the appellant had also produced the contribution made to the Employees Provident Fund for each of the Directors, as required in case of other employees under the relevant Laws. Similarly, the Form-32 as required to be filed under the Companies Act, with the Registrar of companies, the four directors are shown as executive directors indicating that they are employees of the company.
It is the agreement between the employer i.e. company and the Director would reveal the exact relationship between them. In the present case, no such agreement exists between the employer and the Directors, hence there exists no employer-employee relationship.
All the necessary deductions on account of Provident Fund, Professional Tax and TDS under Section 192 of the Income Tax Act are made as applicable; also they were issuing Form-16 like it is issued to all other employees. Even in the salary return filed by the appellant company before the Income Tax authorities, the director’s names have been included. The company does not pay the director’s sitting fee to any of the directors. To discredit the said statement, no contrary evidence was produced by the Revenue to establish that the directors are not involved in the day to day function of the Company, but participate only in Board Meetings and consequently paid remuneration.
Also, from the documents produced by the Appellant it is crystal clear that the Directors who are concerned with the management of the company, were declared to all statutory authorities as employees of the company and complied with the provisions of the respective Acts, Rules and Regulations indicating the Director as an employee of the company – No contrary evidence has been brought on record by the Revenue to show that the Directors, who were employee of the appellant received amount which cannot be said as ‘salary’ but fees paid for being Director of the company – The Income Tax authorities also assessed the remuneration paid to the said directors as salary, a fact cannot be ignored.
Appeal allowed – decided in favor of appellant.
Legal position in Income Tax Law
Under the Income Tax Act, 1961, the remuneration paid to directors is subjected to TDS u/s 192 of the Income Tax Act, 1961. Section 192 provides for deduction of TDS in case of payments which are Salary.
The said remuneration received is in lieu of managing the affairs of the company in the capacity of employee and taxed as salary in hands of directors.
Also, the remuneration paid to the directors is assessed under the head “Income from Salary” by Department of Income Tax.
Non-Executive Directors are not entitled to remuneration but are subject to payment of Sitting Fees. As far as Director Sitting Fees paid is concerned, the same is liable for deduction under section 194J and considered as professional fees and not Salary.
The view upheld by Hon’ble Advance Ruling Authority in M/s. Alcon Consulting Engineers (India) Pvt. Ltd. [2019 (10) TMI 793] and M/s Clay Craft India Private Limited [RAJ/AAR/2019-20/33] seem to be flawed as they have ignored the fact that the directors can also work in the capacity of the employees of the company and the remuneration in respect of such services may be governed by clause 1 of Schedule III to Sec 7 of CGST Act. Thus, any remuneration received by a director in any capacity other than employee is exigible to GST. Schedule III of CGST Act, 2017 inter alia among others provides for employee services as transaction which are neither considered as supply of goods or supply of service. The various positions where a director draws remuneration for employee services are not exigible to the levy of GST, while in all other cases, it shall be exigible to GST. The similar view has also been reiterated by Advance Ruling Authority of Karnataka in case of M/S. Anil Kumar Agrawal [2020 (5) TMI 221].
Furthermore, services in the capacity of a director shall only be exigible to GST under reverse charge mechanism. Services of a person in capacity of an employee shall be outside the ambit of GST. In authors view, a director can also rent his shop to Company but then this entry cannot cover that service also. Since there are numerous services which a person can give to company including rental, right to use IPR, renting of tangible asset, etc. and thus, the terms services by a director cannot be presumed to include person’s other services. Any other services of a person (who is a director) in a capacity other than director like rental etc. may be chargeable to GST but under forward charge.
It is however recommended that it has been noticed in various cases specifically in SME sectors, there is no proper agreement between the directors and the company in respect of services provided by them. For Instance, if the director is serving as an employee, then there may be a proper employment agreement having salary break-up along with records of EPF payments. Similarly, if the director is providing other services like renting of immovable property or acting as a consultant, there may be adequate documentation for the same. This will serve as an aid at the time of assessments or if any adverse view is taken by the department.
|CA. Chitresh Gupta
FCA, LL.B , B. Com(H)
Co-Author of book “GST –Law, Analysis & Procedures”
Faculty on Goods & Services Tax by ICAI
Email : Chitresh.gup[email protected]
|CA. Shilpi Gupta
FCA, M.Com, B.Com(H) -SRCC
Co-Author of book “GST –Law, Analysis & Procedures”
Faculty on Goods & Services Tax by ICAI
Email : [email protected]