GST on Director’s Services - An Instigating Litigation with multiple Absurdity

[niranjan gupta]

1. General Background:

1.1 The legislature seems to have been marred by numerous interpretation and cause unintended disputes between tax payers and tax authorities. The corporates are still trying to interpret the divergent view held by various Advance Ruling authorities on the taxability of various services of different natures provided by directors of a Company incorporated under Indian Companies Act. There are two possibilities in which a director can serve the company:   

 1. An employee under Master and Servant relationship, and

2.  A professional.

1.2 Authorities for Advance Rulings has passed three judgments. Two authorities ruled as taxable and one ruled as not taxable under GST Laws. It has been recognized by existing laws i.e Service tax as well as other laws like Companies Act, Income tax Laws, PF etc., that a director has master and servant relationship in some cases, in certain circumstances, director works as a professional. The controversy is mainly because of notification number 13/ 2017 Central Tax (Rate) dated 28 June 2017 issued under section 9(3) of the Central Goods and Services Tax Act, 2017 (CGST Act). According to the notification, reverse charge is applicable on Services supplied by a director of a company or a body corporate to the said company or the body corporate. On the other hand, according to schedule III to the Central Goods and Service Tax Act, 2017,services by an employee to the employer in the course of or in relation to his employment is neither a supply of goods nor services. Hence, the cause of dispute.

1. Proactive steps to be identified to safeguard the “Dispute”

2.1 A relationship with a director will decide the taxability under GST Laws. Following disputes are in consideration in this article.

2.2 Dispute No 1:What are the parameters which could prove to be of aid, while proving the Master and Servant relationship and also proves that the services are provided in the course of employment as an employee?

2.3 Dispute No 2:What are the parameters which could prove that the services are provided as a Professional?

2. Legal Provisions under GST

3.1 Entry no 1 to Schedule III of CGST Act states that the services by an employee to employer in the course of or in relation to his employment shall be considered as activities or transaction which shall neither be treated as a supply of Goods nor a supply of Services.

3.2 Serial no. 6 of Notification no - 13/2017 - Central tax (Rate) dated 28.06.2017 under section 9(3) of the CGST Act, 2017 states that ‘Services supplied by a Director of a company or a body corporate to the said company or the body corporate’ shall be paid on reverse charge basis by the recipient of the such services, wherein Supplier of Services is ‘A director of a company or a body corporate’ and Recipient Services of Services is ‘The company or a body corporate located in the taxable territory’.

Accordingly, services rendered by a director as a servant is covered under point no. 3.1 and  Director servicing as professional is covered as provision of service. But the notification puts all the services by a director under reverse charge.  

4. Analysis on “The kind of Relationship a Company and a Director could have”

4.1 Relationship No 1:Why does a company need a Director and why Directors are called the Employee of the Company?

a) A Company is an artificial person incapable of acting by itself i.e. it is invisible, intangible and exists only in contemplation of law which means it’s a separate legal entity. However, a company is not a natural person, i.e. it has no mind or body of its own to think and take decisions. Therefore, a company cannot act by itself and consequently it has to depend upon some human’s agency to act in its name.

b) Two human agencies, through which a company acts, are “the Board of Directors”and its Directors.

c) Directors are accountable to the Board and Board to the members of the Company. Directors are appointed to execute the work on behalf of the company through Board of Director.

4.2 Relationship No 2: Directors provide services in its professional Capacity. A director according to his expertise and knowledge may provide following services to the company which are as follows:
a) Professional & Consultancy services provided to the company;
b) Renting of the Immovable property to the company;
c) Trading within the goods to/from the company;
d) Personal guarantee provided to the company

4.3 Accordingly, a director of a company act in two capacities. One as a Master and servant and second as a professional. Before moving further, let’s understand “Master - Servant relationship”: In a Master-Servant relationship, the master employs the services of the servant and he works on the command of master and thus a special relation exists between the two and in case of a tort committed by the servant, it is deemed that his master was doing that act himself, therefore the master will be held liable for the unlawful act.

4.4. It is pertinent to note that, if the director is appointed by the Board of Director to manage the day to day affairs of a company then it constitutes a “Master - Servant relationship” or “Employee - Employer relationship” viz. serving to the Board of Directors and finally to the company as per their decisions and for all unlawful act as an employee, the company shall be held liable.

4.5 On the other hand in relationship no 2, the director is serving in its individual capacity and charging separate fees for its expertise and knowledge as a Professional.

Hence, the company shall not be held liable for any unlawful act conducted by the director in its individual capacity.

4.6 According to the Companies Act, there are certain class of directors. The same is explained as under:

S.no	Type of Directors	Definitions as per Companies Act 2013	TDS Provision as per Income Tax on Employee or Non-Employee
1	Whole Time Director	Section 2(94) of the Companies Act, 2013 defines the term ‘whole-time director’ as a director, who is in the whole-time employment of the company.	Since the director is working in the course of employment hence his services performed as an employee to the company and TDS u/s 192 has been deducted and deposited by the Company.
2	Managing Director	Section 2(54) of the Companies Act, 2013 defines ‘Managing Director’ as 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.	The services performed by Managing Director in the course of employment. It was held in Employees’ State Insurance Cooperation vs. Apex Engineering Pvt Ltd held that Managing director of the company shall also be termed as an employee since he is in whole time employment and hence TDS u/s 192 has been deducted and deposited by the Company.
3	Executive Director	Rule 2(1)(k) of the Companies (Specification of definitions details) Rules, 2014 defines it to mean a whole Time Director as defined in Section 2(94) of the Companies Act, 2013.	Executive director given the same description as that of WTD, he serve as an employee of the company. Therefore, TDS u/s 192 has been deducted and deposited by the Company.
4	Non-Executive Director	Non-Executive director, not specified in the act and will be the one not being an Executive Director.	Non-Executive director, not serving the company in relation to an employment agreement and shall be classified as providing services independently and in an individual capacity i.e. as a Professional and TDS u/s 194J has been deducted and deposited.
5	Independent Director	Section 149(6) of the Companies Act 2013 defines Independent Director, who is a person of great integrity and possesses relevant expertise & experience.	An Independent director has been kept separated from the one specified to be serving in terms of their employment agreement, Hence he is a non-employee to the company and TDS u/s 194J has been deducted and deposited.
6	Nominee Director	Nominee director is the one appointed by the institution that has invested in or lent to the company. Companies Act 2013 states that Nominee director cannot be same as independent director	By virtue of explanation as inserted in Companies Act 2013, it can be said that nominee director is also serving in the course of employment, not being employed by the company but the institution and is thereby eligible for remuneration and accordingly said to be an employee of the company. Therefore, u/s 192 has been deducted and deposited.

5. Provisions in other laws, judicial precedents and administrative guidelines:

5.1 In service tax regime, services rendered by an employee to the employer in the course of or in relation to his employment were outside the scope of service tax. Thus, no service tax was levied where the remuneration was paid for routine work but not for the consultancy services. To support this, we have a few judgments and clarifications:

5.1.1 M/S ALLIED BLENDERS AND DISTILLERS PVT. LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE & SERVICE TAX, AURANGABAD [2019 (1) TMI 433 - CESTAT MUMBAI]

In this case it was held that where assesse - company paid remuneration to its the whole-time directors for managing day-to-day affairs of the company and made necessary deductions on account of Provident fund, Professional Tax and TDS as applicable and declared these directors to all statutory authorities as employees of the company, remuneration paid to them was nothing but salary and assesse was not required to discharge service tax on remuneration paid to the directors.

5.1.2 NRB INDUSTRIAL BEARINGS PVT. LTD VERSUS CCE & ST, AURANGABAD [2019 (8) TMI 600 - CESTAT MUMBAI]

The person was appointed as a Managing Director and salary was paid to him as per MOA and AOA. Forms filed before ROC, has mentioned salary and perquisites payable/paid to the managing director. Since no evidence was produced by the department which provides that remuneration was not for routine work but for the consultation provided, therefore, service tax not leviable on salary paid to the managing director.

1.  

3.  Departmental Circulars:

5.1.3.1 The CBIC clarifiedthat the amount paid by the companies to Managing Director/Directors (Whole-time or Independent) even if termed as commission, is not 'commission' within the scope of business auxiliary service and, hence, service tax would not be leviable on such amount. It further clarified that Managing Director/Directors (Whole-time or Independent) being part of the Board of Directors, perform management function and not a consultancy or advisory function. Thus, the payments made by Companies to Directors could not be termed as payments made for providing the management consultancy service.

5.1.3.2 The MCA issued a circularabout the applicability of Service-tax on commission payable to Non-Whole Time Directors of a company under Section 309(4) of The Companies Act, 1956. The Non-Whole Time Directors of the Company are presently not covered under the exempted list and, thereby, the sitting fee/commission payable to them by the company is liable to Service Tax. Thus, it can indirectly be inferred that the sitting fee/commission paid to Whole Time Directors by the company shall not attract Service tax.

6. Controversy between the Orders passed by Advance Ruling Authorities

6.1 In the case IN RE: M/S. CLAY CRAFT INDIA PVT. LTD. [2020 (4) TMI 228 - AUTHORITY FOR ADVANCE RULING RAJASTHAN]  it was held that “consideration paid to the Directors is against the supply of services provided as the Directors not as the employee of the Company, 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 Central Goods and Services Tax Act, 2017”

6.2  in the case of IN RE: M/S. ALCON CONSULTING ENGINEERS (INDIA) PVT. LTD. [2019 (10) TMI 793 - AUTHORITY FOR ADVANCE RULING, KARNATAKA] held that the services provided by the Directors to the Company are not covered under clause (1) of the Schedule III to the Central Goods and Services Tax 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 taxable under GST.

6.3 In case of IN RE: M/S. ANIL KUMAR AGRAWAL [2020 (5) TMI 221 - AUTHORITY FOR ADVANCE RULING, KARNATAKA] there is a divergent view on the same issue wherein it has been held that“the applicant could be employee of the said company i.e. executive director or he could be a non-executive director providing his expertise and consultancy to the company as and when required. Moreover it was also held that the records of PF, ESI would have also proven that the director is a salaried director”. It is very common to see that different states AARs give dissenting views on similar issues, but it is erratic to find the same bench of AAR giving differing views in a span of less than six months.

6.3 The above view of Karnataka AAR seems to be more balanced than counterpart in Rajasthan AAR in case of IN RE: M/S. CLAY CRAFT INDIA PVT. LTD. [2020 (4) TMI 228 - AUTHORITY FOR ADVANCE RULING RAJASTHAN] However in September 2019, the same Karnataka AAR gave a conflicting view on a similar matter in case of IN RE: M/S. ALCON CONSULTING ENGINEERS (INDIA) PVT. LTD. [2019 (10) TMI 793 - AUTHORITY FOR ADVANCE RULING, KARNATAKA] wherein the authority held that “GST should be charged on remuneration paid to the directors irrespective of they being executive director or non-executive director”.

7. Conclusion  

To sum up, following are some parameters that may play a vital role in making decision with regard to status of a Director:

1. Type of directors on the board of company viz. executive directors or non-executive directors;
2. Relationship with the Company
3. The remuneration in form of compensation offered to such directors;
4. Others: TDS deducted and deposited, ROC forms, Provident fund records, ESI, letter of Intent, employment agreement.

It is important to note that Section 7(2) starts with a non-obstante clause, which gives primacy over Section 7(1). Which implies that the provision of service by the Director at the foremost ought to qualify as a ‘supply’ under Section 7 of the CGST Act. Only if it qualifies as a supply, the services of Directors can be held to be liable to tax under RCM as per Entry 6 of the Notification No.13/2017 - Central Tax (Rate) dated 28.06.2017.

Whereas, Entry No. 1 of Schedule III to the CGST Act covers “services by an employee to the employer in the course or in relation to his employment”. The entry and the wordings thereof seems unambiguous. It can be inferred that the services provided by an employee to the employer in the course of or in relation to employment is outside the scope of supply per se and not be leviable to GST.

(Authors: N K Gupta, Sr Executive Director, CA Manish Aggarwal and CA Neelam Yadav of S S Kothari Mehta & Co)