CA Pradeep Jain, CA Neetu Sukhwani
Introduction:- The issue regarding leviability of service tax on remuneration paid to the directors has been matter of concern since 07.08.2012 when reverse charge mechanism was introduced vide notification no. 45/2012-ST dated 07.08.2012 for the service tax liability as regards services provided by a director to a company. The question as regards what kind of amount paid to the directors is leviable to service tax has haunted the minds of various company assessees because since then, a number of companies have been slapped service tax demands with interest and equivalent penalties for non-payment of service tax under reverse charge mechanism for amounts paid to the directors. The amendment made in the Budget 2014 vide Notification no. 10/2014-ST dated 11.07.2014 has further added fuel to the fire of litigation by extending reverse charge mechanism for services provided by directors to company or a body corporate and the defination of body corporate under section 2(11) of the Companies Act, 2013 has a very wide scope. In this article, an attempt is made to untangle the conceptions taken as regards service tax liability with respect to services provided by directors.
Quick look at relevant statutory provisions:- Entry no. 5A of the Notification no. 30/2012-ST dated 20.06.2012 reads as follows:-
|Sl. No.||Description of service||% of service tax payable by service provider||% of service tax payable by service receiver|
|5A||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.||–||100%|
The defination of service as given under section 65B (44) of the Finance Act, 1994 is produced as follows:-
“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-
(a) An activity which constitutes merely,-
(i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause 29(A) of article 366 of the Constitution; or
(iii) A transaction in money or actionable claim;
(b) A provision of service by an employee to the employer in the course of or in relation to his employment;
(c) Fees taken in any court or tribunal established under any law for the time being in force.”
Analysis of the statutory provisions:- It is pertinent to note that the whole time directors, managing directors and executive directors are engaged in managing day to day functioning of the company or the body corporate and so can be considered as employees of the company. Furthermore, the fact that the TDS is deducted under section 192 Income Tax Act, 1961 on the salary/remuneration paid to the whole time directors/managing directors/executive directors is conclusive evidence that the amount paid as remuneration is nothing but consideration paid for services rendered by such directors in the capacity of employee of the company. Furthermore, the fact that remuneration received by the whole time directors, managing directors etc. is shown in their Income Tax Returns under the head ‘Income from Salary’ also fortifies the fact that the amount received is in lieu of their employment with the company. As such, when CBDT, being one of the wing of the government department is accepting the amount paid to the managing directors, whole time directors etc. as salary in lieu of employment, the other wing of the government department, i.e., CBEC cannot take a contrary stand to levy service tax on the same. Therefore, the consideration received by the directors in lieu of managing day to day affairs of the company is infact in the capacity of employee and cannot be considered as ‘service’ as per the defination of service given under section 65B(44) of the Finance Act. When the activity of managing day to day affairs of the company by a director is treated as in relation to employment, the said activity is outside the purview of the defination of service and consequently no service tax is leviable on the same. Furthermore, when an activity is not within the ambit of ‘service’, the question of reverse charge mechanism does not arise. However, following points are also worth observing in this context:-
Before Parting:- It can be concluded that service tax is payable only on the amounts paid to the directors other than in lieu of their capacity as employee of the company. Furthermore, the non-executive directors of the company are not paid salary as they are not involved in executing/managing day to day affairs of the company. Therefore, the sitting fees/commission etc. payable to non-executive directors and the executive/whole time directors/managing directors is leviable to service tax. However, amount paid as salary for which TDS is deducted under section 192 of the Income Tax Act, 1961 is not leviable to service tax as the said amount is received by the directors in lieu of their employment with the company. It is practically observed that various companies are being raised demand for service tax on the total amount paid to the directors but one is required to examine the amounts for which service tax is leviable. Furthermore, the companies should pay service tax on the sitting fees/commission and other amounts paid to the directors which do not form part of salary because the company is entitled to take cenvat credit of the amount paid as service tax under reverse charge mechanism on the strength of challan. As such, there is no loss to the company in paying service tax and instead, non payment of service tax may attract interest and penal consequences.