In re Clay Craft (India) Pvt. Ltd (GST AAAR Rajasthan)
AAAR Rajasthan held that remuneration, if any, paid by the appellant to the independent directors or those directors who are not the employee of the appellant is taxable in hands of the appellant, on reverse charge basis. Further, the part of Director’s remuneration which are declared as Salaries in the books of the appellant and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017. The part of employee Director’s remuneration which is declared separately other than “salaries” in the appellant’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 and in terms of notification No. 13/2017 Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the appellant, is liable to discharge the applicable GST on it on reverse charge basis.
FULL TEXT OF ORDER OF APPELLATE AUTHORITY OF ADVANCE RULING,RAJASTHAN
(Proceedings under Section 101 of the Central Goods and Services Tax Act, 2017 read with Section 101 of the Rajasthan Goods and Services Tax Act, 2017)
At the outset, we would like to make it clear that the provisions of both the Central GST Act, 2017 and the Rajasthan GST Act, 2017 are same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the Central GST Act, 2017 would also mean a reference to the same provisions under Rajasthan GST Act, 2017.
2. The present appeal has been filed under Section 100 of the Central GST Act, 2017 (hereinafter also referred to as ‘the CGST Act”) read with section 100 of the Rajasthan GST Act, 2017(hereinafter also referred to a” RGST Act”) by M/s. Clay Craft (India) Pvt. Ltd., F-766 A, Road No. – 1-D , V.K.I. Area, Jaipur, Rajasthan 302013(hereinafter also referred to as ‘the Appellant’) against the Advance Ruling No. RAJ/AAR/2019-20/33, dated 26.02.2020.
Brief Facts of the case
3.1 The appellant, i.e. M/s. Clay Craft (India) Pvt. Ltd., F-766-A, Road No. 1-D, VKI Area, Jaipur (hereinafter also called as the “appellant”) are engaged in the manufacture of bone China Crockery, Transfer Sheet Decalcomania, other Utensils Item and Moulds & Die falling under chapter heading No. 69111011, 49081000, 84801000 & 84801000 of the Tariff. They are registered with Goods & Services Tax department and are having GST registration No. 08AAACC6866D1ZO.
3.2 Presently Board of Directors of the appellant company consists of six (6) directors. It has been submitted that all the above-mentioned Directors are performing all the duties and responsibilities and duties as required under the laws. However along with that these all directors are also 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. In other words, they are also working as an employee of the company for which they are being compensated by the company by way of regular salary and other allowances as per the company policy and as per their employment contract. In fact, these Directors are treated at par with any other employee of the company as far as their employment is concerned. The company is deducting TDS on their salary and PF laws are also applicable to their service. Therefore, for all practical purposes, these directors are the employees of the company and are working as such besides being Directors of the company.
3.3 Recently, the Hon’ble Authority of Advance Ruling, Karnataka (Bengaluru) in the case of M/s Alcon Consulting Engineers (India) Pvt. Ltd. Bengaluru, has ruled that the appellant 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 appellant company and hence the same is liable to tax under reverse charge basis under section 9(3) of the Central Goods and Services Tax Act, 2017.
3.4 In the backdrop of above circumstances, the appellant reconsidered the situation afresh and approached to Rajasthan Authority of Advance Ruling for clarification on the matter and put up the following question for their kind consideration:-
(a) Whether GST is payable under Reverse Charge Mechanism (RCM); the salary paid to Director of the company who is paid salary as per employment contract, after deduction of TDS as well as PF.
(b) Whether the situation would change from (a) above if the Director also is a part time Director in other company also.
3.5 The Authority of Advance Ruling, Rajasthan given Ruling No. RAJ/AAR/ 19-20/33 dated 26.02.2020 as under:-
a. The consideration paid to the Directors by the applicant company will attract GST under reverse charge mechanism as it is covered under entry No. 6 of notification No. 13/2017 Central Tax (Rate) dated 28.06.2017 issued under Section 9(3) of the CGST Act, 2017.
b. Situation will remain same as (a) above and will attract GST under reverse charge mechanism.
3.6 Aggrieved by the aforesaid Ruling, the appellant has preferred the present appeal before this forum.
GROUNDS OF APPEAL
4. The appellant in its Appeal has, inter-alia, mentioned the following grounds of Appeal:
4.1 The Authority for Advance Ruling has erred in deciding that the consideration paid to the Directors by the applicant company will attract GST under reverse charge mechanism as it is covered under entry No. 6 of notification No. 13/2017 Central Tax (Rate) dated 28.06.2017 issued under Section 9(3) of the CGST Act, 2017.
4.2 It is submitted that in the impugned ruling of Authority of Advance Ruling, it has been ruled that the “consideration” paid to Directors would attract GST under reverse charge mechanism.
4.3 However the point submitted by the appellant was that whether the salary paid to the Directors who are working whole time in the company and were paid salary under a contract of employer employee, would attract GST under Reverse Charge Mechanism (hereinafter also called as the RCM).
4.4 It is submitted that Directors of the appellant company are working whole time for the company and their employment has been effected under a service contract of employer employee. Therefore they are in all practical purposes employee of the company. As submitted supra, the company have been deducting TDS and EPF from their salary as required under the Income tax laws and EPF provisions.
4.5 It is submitted that the term “whole term Director” has been defined under The Companies Act, 2013 as “whole-time Director includes a director in the whole-time employment of the company”. This definition clarifies that a Director can be an employee of the company. Further the appellant refer to the judgment in Ramaben A. Thanawala vs Jyoti Ltd And Others (AIR 1958 BOM 214, (1957) 59 BOMLR 67] decided by the Hon’ble Bombay High Court, wherein it was mentioned that “……………….. It seems to us that the expression whole-time-Director Must refer to a Director who spends his whole time in the management of the company in the same sense as Managing Director does”. This definition and citation clearly bring out the element of employment of Whole-time Directorship.
4.6 In case of employee, there is a contract of service, while in the case of independent service provider there is a contract for service. The distinction between these terms has been upheld by a full bench of the Supreme Court in Indian medical Association vs V.P. Shantha [1956 AIR 550, 1995 SCC (6) 65].
A- Contract for service implies a contract whereby one party undertakes to render services e.g. professional or technical service, to or for another in the performance of which he is not subject to detailed direction and control but exercises professional or technical skill and uses his own knowledge and discretion.
4.7 Appellant further submits that the provisions of Reverse Charge Mechanism under the GST law and erstwhile Service Tax are similar. For ready reference these are mentioned below.
a. Under the Service Tax regime Notification No. 30/2012 -ST dated 20.06.2012 was amended vide Notification No. 45/2012-ST dated 07.08.2012 and an entry was inserted as under:
