GST on Director's Remuneration-Extensive analysis

[Atul Rathod]

IN RE: M/S. CLAY CRAFT INDIA PVT. LTD. [2020 (4) TMI 228 - AUTHORITY FOR ADVANCE RULING RAJASTHAN]

GST on Director’s Remuneration-Extensive analysis

One of the messages being forwarded in common groups is advance ruling issued by Rajasthan AAR as quoting “Directors are not company-employees, salary/remuneration paid to them taxable under ‘reverse charge’. In the light of the above ruling, let us make an analysis on the headed issue and the validity of the above ruling in accordance with the law:

Background

Section 9(3) & 9(4) of the act gives power to government to notify the service on which liability to pay tax has been shifted from supplier to the recipient of supply. The said services have been notified vide notification no. 13/2017-CT(Rate) dated 28 June 2017. One of the services notified is “Service supplied by a director of a company or body corporate to the said company or the body corporate” in which liability to pay tax has been casted on the Company or body corporate. In the light of the above background let us analyses the following question?

• Whether every service provided by the director would fall under the said notification irrespective of the capacity in which director provides such service?
• Whether every kind of remuneration received by the director would be liable under said notification?
• Whether clause of schedule III still holds goods to the relationship of every directors-company?

Company law provisions and analysis

There are various types of directors in the company such as whole-time, part-time, managing, independent etc. However, all the various types of directors based on designation divided into two types of category such as Executive or Non-Executive. For Ex: option of ‘Non-executive director’ cannot be selected if designation selected is Whole-time director or Managing director whereas ‘Executive director’ cannot be selected If they are ‘Independent’ directors. The said selection needs to be done at the time of filing DIN-12 which is a return containing the particulars of appointment of director.

At this juncture its very important to note the basic difference between Executive directors (henceforth referred as “ED”) and Non-executive directors (henceforth referred as “NED”). The basis difference is ED is a member of the board of the firm who also has management responsibilities whereas NED is a member of the board member without responsibilities of daily management or operation of the company or organization.

Generally, ED’s are paid fixed salary along with allowances and perquisites as may be recommended by the recommended by Nomination and remuneration committee and confirmed by the board subject to over-all limits prescribed under the companies act whereas ND’s are paid remuneration in the form of sitting fees or profit related commission.

Its important to put an eye on the definition of remuneration which is defined in the sec 2(78) of the act which says, “any payment in the form of money or its equivalent would be counted as remuneration”. Perquisites would also be included in determining total remuneration. Perquisites in this case are those as defined under the Income tax Act, 1961.

From the above provisions, it can be constructed that ED’s are given importance at par with employee whereas ND’s are given importance of the professional.

Treatment under Income tax

In income tax TDS is deducted under section 192 with respect to remuneration paid as salary to ED’s. and the said income will be assessed as Income from Salary whereas TDS is deducted under 194J with respect to remuneration paid to NED’s.

GST analysis-Schedule III

However, coming to GST it is to be noted that service of an employee to an employer in the course of his employment is neither a supply of goods nor a supply of service in accordance with schedule III of the act. But the term “employee” or “employment” neither defined in the GST act nor in the companies act. However, reference can be made to the employee definition in the companies act defined only for the purpose of the section 62 which as it includes whole-time director or any other director but does not include the independent director who falls under ND. Further in common parlance, the person who is being paid salary and TDS deducted under 192B is not disputed under TDS act, shall be treated as employee.

Further author would like to decision of Hon’ble apex court in case of Ram Pershad vs Commissioner Of Income-Tax, [1972 (8) TMI 61 - SUPREME COURT], Income tax, Delhi where the relationship of a managing director with the company was clearly explained relying on the decision of Scottish court of session in Anderson Vs James Sutherland (Peter head) Limited 2 where Lord Normand at para 218 said “the managing director has two functions and two capacities. Qua Managing Director, he is a party to a contract with the company and this contract is a contract of employment; more specifically I am of the opinion that it is a contract of service and not a contract for service”.

To identify whether relationship between Company and managing director is of employee-employer or not, one must investigate the existence of principle of “master and servant” between company and director.  A servant acts under the direct control and supervision of his master. However, in the exercise of his work as director, is not subject to the direct control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him from time, to time by his principal. But this test is not universal in its application and does not determine in every case, having regard to the nature of employment, that he is a servant. A chauffeur who is employed to drive the car for his employer. If he is to take the employer or any other person at his request from place 'A' to place 'B' the employer does not supervise the way he drives between those places. Such example can be multiplied.

It is again true that. a director of a company is not a servant but an agent inasmuch as the company cannot act in its own person but has only to act through directors who qua the company have the relationship of an agent to its capacity. Managing Director may have a dual capacity. He may both be a Director as well as employee. It is therefore evident that in the capacity of a managing- director he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee'. or an agent depending upon the nature of his work and the terms of his employment.

Once it is established that executive directors are employees of the company and subjected to income tax as per the salary, the said remuneration paid from the company shall be treated as paid in due course of employment and service of director would rightly fall under schedule III of the act. Based on the above, it would be treated as neither supply of goods nor supply of service.

GST analysis-RCM

Further coming to the remuneration paid in the form of sitting fees to ND’s are liable for TDS deduction under section 194J and rightly taxable under Reverse charge Mechanism (henceforth referred as “RCM”).

Let us analyze whether all the types of remuneration paid to ND’s are liable for RCM?

It is to be noted that not all types of remuneration/consideration paid to ND’s are liable for RCM. Only the remuneration which to paid to ND’s for supply of services provided by them in capacity of a directors are liable for RCM. The notification only says the “service provided by the director”, though it is to be noted that intension was only to bring the services supplied by the director in the director’s capacity clearly says that service provided by a director to a company and not the supply of service provided in the individual capacity.

There is no legal backing for such conclusion however, in author’s view the same was intention of the government initially at the time of taxing such service under reverse charge for the first-time in-service tax regime. For ex: if a director provides a service of renting of an immoveable property in individual capacity and receives the remuneration towards sitting fees, then only remuneration towards sitting fees would be chargeable to RCM and consideration received towards renting of immovable property would be levied under forward charge.

Circular issued by Ministry of Corporate affairs under Service tax Regime

The relevance can be taken from the circular issued by MCA in 2012, though said circular was issued in context of increase in remuneration on account of payment of service tax by company on remuneration paid towards sitting fees or commission to Non-whole time directors.

However, it is specified mentions that “The Non-Whole Time Directors of the company are presently not covered under the exempted list and as such, the sitting fees/commission payable to them is liable to Service Tax. Service tax is payable on the commission/sitting fees payable to Non-Whole Time Directors of the company.”

Practical issue

Further, practically Advocates, CA’s who are directors in any company for which their responsibilities are equivalent to employee and as good as executive director, but TDS is deducted under section 194J, will mere the deduction of TDS under section 194J and selecting in DIR-12 as Non-Executive would be enough to cast the liability under reverse charge? Yes, in authors view these two factors are enough to cast the liability under reverse charge.

Decision in the service tax regime:

It was held in case of  M/S ALLIED BLENDERS AND DISTILLERS PVT. LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE & SERVICE TAX, AURANGABAD [2019 (1) TMI 433 - CESTAT MUMBAI]. by Hob’ble CESTAT of Mumbai that “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” and set aside the demand raised on remuneration paid to directors under reverse charge mechanism.

Analysis on the above decision

In the recent advance ruling given by the Rajasthan AAR in case of clay craft private limited wherein it was decided that directors are not companies-employee and salary/remuneration paid to them are liable under RCM. The author differs from the said decision due to following reasons:

• The ruling is issued without considering the relationship between director and company from the contract such as Form DIR-12 or Form 32/AOA and directly concluded that directors are not the employees of the company.
• The ruling also has not dealt with the possibility of a person being director of the company and simultaneously working as a director/employee
• No differentiation was made between remuneration paid towards salary and sitting fees.
• No income tax TDS provision were taken into count.
• Ruling was passed mere going into the RCM notification and no discussion was made on clause 1 of Schedule III of the act. 

One needs to carefully consider the facts of the case with respect to type of remuneration paid and decide the RCM liability accordingly. Therefore, in authors view the said ruling might get reversed at the Appellate authority of advance ruling, if the same is challenged.

Suggestions with respects to questions

• Whether every service provided by the director would fall under the said notification irrespective of the capacity in which director provides such service?
  • No, only supply of service provided by the director in the capacity of director of the company would be liable for RCM.

• Whether every kind of remuneration received by the director would be liable under said notification?
  • No, only the remuneration received by the directors towards consideration for supply of service provided in capacity of directors. For ex: Sitting fees, Commission paid to NED’s based on annual performance of the company.

• Whether clause of schedule III still holds goods to the relationship of every directors-company?  
  • Yes, but only for the service provided by ED’s and not for the service provided by the NED’s.

Views are personal and should not be considered for professional opinion. For any queries/comments, the author can be reached at caatulrathod@gmail.com