Analysis of applicability of GST on Director Remuneration in view of recent AAR Ruling in the case of Clay Craft India Pvt Ltd
At the outset, I would like to draw attention to serial no. 6 of Notification No. 13/2017 ‐ Central Tax (R) 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. The whole controversy of applicability of GST on Director Remuneration emerge due to aforesaid entry in notification No 13/2017.
Further, before going ahead Clause 1 of Schedule III attached to CGST Act 2017 states that Services by an employee to the employer in the course of or in relation to his employment is neither a supply of goods nor a supply of services.
Now will understand why controversy emerged. There are two authority of advance ruling (“AAR”) which held that remuneration to director is liable for GST under Reverse Charge Mechanism (“RCM”).
1St AAR Ruling
AAR of Karnataka in case of M/s. Alcon Consulting Engineers (India) Pvt. Ltd. AR No. KAR ADRG 83/2019 Ltd wherein it has been 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. Hence, the company is liable for the payment of GST under RCM.
2nd AAR Ruling
AAR of Rajasthan in case M/s Clay Craft India Private Limited [RAJ/AAR/2019‐20/33] which has hold a similar view as held by AAR in case of Alcon Consulting Engineers (India) Pvt hereinabove despite of appellant submission which is as under:-
1) Directors are also working apart from working as Board of Directors in the company at different level like procurement of raw material, production, quality checks, dispatch, accounting etc.
2) They are working as an Employee of the company.
3) Salary is regularly paid to the directors, TDS is also being deducted as applicable on salary u/s 192 , Provident Fund and other benefit is also the same at par with other employees and as per company policy. Etc.
Despite above submission AAR has held that director is not the employee of the company and the Consideration paid to director is covered under RCM as mentioned in entry 6 Notification 13/2017 Center Tax (R).
Now lets us understand whether the director is employee since as per clause 1 of Schedule III of CGST Act 2017 services provided by an employee to the employer in the course of or in relation to his employment is not treated as ‘supply’. Further, on 10.07.2017 Press release has been issued by MOF which says that services by an employee to employer are outside the purview of GST.
Who is Director?
Let’s us now understand the definition of Director as provided in Companies Act 2013 As per Section 2 (34) of Companies Act 2013 director means a director appointed to the Board of a company. Further, the Director is divided into the following categories.
(i) Independent Director: Independent Director means an independent director referred to in Section 149(6) of Companies Act 2013.
(ii) Managing Director: Managing Director means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called. [Section 2 (54) of Companies Act 2013]
(iii) Whole-time director. Whole-time director includes a director in the whole-time employment of the company [Section 2 (94)of Companies Act 2013]
(iv) Nominee Director. Nominee director means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, or any other person to represent its interests [Explanation to Section 149of Companies Act 2013]
Broadly all directors are categorises into two categories which is Executive Directors and Non-Executive Directors. Executive Directors are the Directors, who are involved in the day-to-day affairs of the Company. Considering this, Managing Director and Whole-time director falls under the Executive Directors’ category and Non-executive director is other than the executive director.
Further, a managing director or whole time director cannot resign merely by giving a notice, as formal acceptance of the same is essential to make it complete and effective. This is because, they occupy two positions or possess two capacities, viz (i) one, that of director, and (ii) the other, that of a manager or officer of the company in the sense of wholetime employee. The notice or letter of resignation is therefore required to be approved or accepted by the company and the officer concerned has to be relieved of his duties and responsibilities attached to the office which he has resigned from (Achutha Pal Vs. Registrar of Companies (1956) 36 Comp. Cas 598). However, in case of ordinary director, formal acceptance of resignation is not needed. (Abdul Hug Vs. Katpadi Industries Ltd. A.I.R 1960 mad. 483)
Applicability in Pre GST Regime
Now we will discuss the position in pre-GST era, what was the law and legal position w.r.t applicability of Services tax on director remuneration?
Similar entries as appearing under GST regime was also part of erstwhile service tax law which is the applicability of RCM In respect of services provided or agreed to be provided by a Director of a company to said company.
In this respect we refer Circular No. 115/09/2009 – ST dated 31st July, 2009 wherein it has been stated that it was clarified 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. However, in case such directors provide any advice or consultancy to the company, for which they are being compensated separately, such service would become chargeable to service tax.
Hence, even with similar taxability entries under erstwhile law service tax were not applicable on remuneration paid to the Directors.
Treatment under Income Tax Act, 1961
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.
Also, Director File their income tax return showing remuneration under the head Income from Salary, Income Tax Department also assesse the same under the head “Income from Salary”.
Important Case Law under various Act
Let’s us know discuss some of the important case law wherein Courts has either held director as an employee of the company and /or Service tax is not applicable on remuneration paid to the director.
1. The Supreme Court observed that a Managing Director can be regarded as a principal employer for the purposes of the ESI Act, 1948. Employees State Insurance Corpn. Vs. Appex Engineering P. Ltd.,[(1998) 1 SCC 86 ]. It was held, that a managing director of a company having limited liability would be employee within the meaning of the said Act. In that case, the apex Court clearly held in the facts and circumstances thereof, that all the requisite conditions for applicability of the term ‘employee’ as defined by the Act stood satisfied in the case of the Managing Director, holding that a Managing Director of a company could not be treated at part with partner of a partnership firm who has been given some remuneration for his extra work.
2. Further, recently Supreme Court in 2019 Thein the case of Employee’s State Insurance Corporation V. Venus Alloy Pvt. Ltd. [Civil Appeal No. 1464 of 2019 arising out of SLP (Civil) No. 12812 of 2015] on 5th February, 2019 held that Directors of Company, who are receive remuneration, shall come within the purview of “employee” under Section 2(9) of the Employee’s State Insurance Act, 1948. While setting aside the orders passed by the Employee’s State Insurance Court and the High Court of Madhya Pradesh has taken into consideration the judgment passed by the Supreme Court of India in Apex Engineering Case and has held that what has been decided in the aforementioned judgment in relation to the Managing Director of a Company also applies to the Director of a Company if he gets remuneration for discharge of any duty. The bench ruled that if a Director of a Company is receiving remuneration for discharge of any duty then the Director will come under the definition of “employee” under Section 2(9) of the ESI Act, 1948.
3. Allied Blenders And Distillers Pvt. Ltd. v C.C.E. & T., Aurangabad [2019 (24) G.S.T.L. 207 (Tri. – Mumbai)], wherein Hon’ble Tribunal held that “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. Thejudgments cited by the revenue cannot be applied to the present case as the facts are different and the finding of Income tax authorities accordingly also different in the said case.”
4. In case of Maithan Alloys Ltd. vs. CCE and ST, CESTAT Kolkattahas observed that where the whole time directors who are entitled to variable pay in the form of commission are ’employees’ and payments actually made to them are in the nature of salaries and the same shall not be subject to Service Tax.
Conclusion
Services in the capacity of a director shall only be changeable to GST under the reverse charge mechanism. Services of a person being a director in capacity of an employee shall be outside the ambit of GST, However, Ruling pronounced in the case of Clay Craft India Pvt Ltd by Rajasthan Authority of advance ruling required reconsideration in the opinion of the author since it is not good precedent. Ruling pronounced is non-speaking ruling that is to say mere conclusion without speaking order. In Tata Engineering & locomotive co ltd vs collector of central excise in 2006(203)E.L.T 360 (SC), Hon’ble Supreme Court held that it is not sufficient in a judgment , to give conclusion alone, but it is necessary to give areason , in support of conclusion arrive at. In the opinion of the author Services of a person being a director in the capacity of an employee shall be outside the ambit of GST.
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