Findings & Analysis of The Rajasthan AAR Decision in the case of CLAY CRAFT INDIA PVT LTD
1. Consideration [u/s 2(31) of CGST Act] paid to the Director for the supply of services to the Company Para 5.5
2. Such Consideration is specifically covered under Notif No 13/2017- CT (R) Para 5.7
3. The company is recipient of service and Directors are the supplier Para 5.1 to 5.2
4. Applicant is already paying GST by way of reverse charge mechanism on the commission paid to directors Para 5.3
5. Such Services are not covered under clause (1) of the Schedule III to the CGST Act, 2017 as the Directors are not the employee of the Company. It is very clear that the services rendered by the Director to the company for which consideration is paid to them in any head is liable to pay GST under RCM Para 5.8
6. The case laws citied by the applicant are not relevant in the present case in as much as that the liability to pay GST under RCM in this case is required to be decided on the basis of the existing provisions of CGST law as being discussed briefly in this order
Points Not Considered by The AAR
1. The AAR in Para 5.8 has held that “We further observe that consideration paid to the Directors is against the supply of services provided by them to the applicant company and are not covered under clause (1) of the Schedule III to the CGST Act, 2017 as the Directors are not the employee of the Company”. The Applicant has given the following evidences to substantiate that the directors are employees –
1. Directors are working in the company at different level of management in the company and each one of them is holding charge of procurement of raw material, production, quality checks, dispatch, accounting etc.
2. They are being compensated by the company by way of regular salary and other allowances as per the company policy.
3. There exist employment contracts with the directors.
4. The company is deducting TDS on their salary u/s 192 of The Income Tax Act, appliable for employees.
5. PF laws are also applicable to their service
6. The applicant also cites definition of Director, Manager, MD & Employee under various other Acts
No evidence has been brought on record by the AAR on which such decision is based. Neither does it explain as to why the evidences produced by the applicants have not been considered while deciding to the contrary.
The Hon’ble CESTAT of Mumbai Bench vide its Order No. A/88105 of 2018 dated June 25, 2018 in the case of M/s. Allied Blenders and Distillers (P.) Ltd., has quashed the demand notice on a similar ground
… Points Not Considered by The AAR……
2. The Applicant has already distinguished the services rendered by a Director as an Agent (on which he gets ‘commission’) and the services he renders as an employee (on which he gets a ‘salary’). On that part where the Director is acting as an agent, the applicant pays GST.
The AAR rejects as irrelevant in the present case, the decision of Hon’ble Supreme Court in the case of Ram Pershad vs Commissioner Of Income-Tax, & Hon’ble High Court. of Karnataka in Director, E.S.I. … vs Sarathi Lines (P) Ltd. These decisions distinguishes services of directors on similar grounds
Our Comments
Under Clause 1 of Sch III to CGST Act , Services by an employee to the employer in the course of or in relation to his employment are NOT to be considered as a supply of services at all. Hence there is no question of levy of GST on the same. The Hon’ble AAR has held that Directors are not employees without explaining the reason behind such a conclusion and even without explaining the reason of rejecting the evidences to the contrary produced by the applicants.
Such Ruling is Applicable to the applicants only as per Section 103 of The CGST Act 2017. The applicants may also go to Appeals against such decisions. For all other Tax Payers, the decision is not binding.
Author Bio
It just show the quality of AAR we have under GST laws. It is pity that each state has its own AAR. It is high time that AARs are centralised and high quality of professional are there to announce these decision.