Applicability of RCM on Director Remuneration
Posted By : CA Chitresh Gupta and CA Shilpi Gupta | 06-Jul-2020
Applicability of RCM on Director Remuneration
As serial no. 6 of Notification No. 13 / 2017 - Central Tax (Rate) 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. Thus, the company or a body corporate located in the taxable territory, being recipient of service is liable to pay tax under reverse charge.
In the above background, it pertinent to note that there can be various services which can be provided by the Director to the company and for which the payment is made by company. Some of the examples are;
1. Services as a director/employee for which director remuneration is paid
2. Renting of immovable property
3. Commission on certain transaction
4. Sitting fee
5. Independent Professional/advisory fee
Now, the question arises whether the above services provided by the director would be treated as supply and consequently the payment made by company would be liable to tax under reverse charge?
Judicial Rulings claiming all payments paid to director are liable to RCM
Recently, in Re: M/s. Alcon Consulting Engineers (India) Pvt. Ltd. [2019 (10) TMI 793] - Authority for Advance Ruling, Karnataka observed and 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.
Since the applicant 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 applicant company and hence the same is liable to tax under reverse charge basis under section 9(3) of the CGST Act, 2017.
Further, again in the case of M/s Clay Craft India Private Limited [RAJ/AAR/2019-20/33], the advance ruling authority for Rajasthan uphold the above view.
However, it may be noted that in both the aforementioned advance rulings the ld. AAR without specifically disproving the submissions and contentions of the applicant held that Directors are not employees of the Company and GST should be paid under reverse charge on any payment to the directors.
Flaws in the above rulings
In both the aforementioned advance rulings, a very important question that has not been considered and deliberated by Authority is ‘whether the director of a company is employee or not’? The ruling simply states that since the services are provided by director to the company, these shall be covered under section 9(3) [reverse charge] and the company is liable to pay tax on the same.
Thus, the above advance rulings are not good legal precedent. Ld. AAR is acting in a quasi-judicial capacity, it should pass a reasoned order and not mere conclusion as to why the contentions of the Applicant is agreed or not agreed to. Mere conclusion without a speaking order by AAR may not be accepted as a precedent by Courts in other cases. In Tata Engineering & Locomotive Co. Ltd. v. Collector of Central Excise, Pune reported in 2006 (203) E.L.T. 360 (S.C.), the Hon’ble Supreme Court, held that it is not sufficient in a judgment, to give conclusions alone, but it is necessary to give reasons, in support of the conclusions arrived at. The Apex Court had set aside the order of the Tribunal, holding that the findings recorded by the Tribunal therein, were cryptic and non-speaking.
Who is an Employee
As the services provided by an employee to the employer in the course of or in relation to his employment are not treated as ‘supply’ as per Schedule III to CGST Act, 2017. It is important to understand the term ‘employee’.
The term ‘employee; has not been defined under the GST Law. However, there are various labour law legislations which define the term ‘employee’ like Factory Act, Employee Provident Fund Act, Employees Estate Insurance Act etc. The definition of employee as provided in these Acts may not be applicable in the GST Law as given with reference to the particular Act. Generally, in order to have a employer and employee relationship, the employer shall exercise absolute and effective control over the employee, not only the sufficient control. The several factors which may be considered for determining the relationship of employer and employee can be:
• who is the appointing authority;
• who is the paymaster;
• who can dismiss;
• how long alternative service lasts;
• the extent of control and supervision;
• the nature of the job e.g. whether it is professional or skilled work;
• nature of establishment;
• the right to reject.
Judicial Pronouncements on Employee-Employer Relationship
Many of these factors shall be applied together in order to determine employer and employee relationship. The employer and employee relationship has been analyzed by the courts at various occasions.
In the case of Brahm Alloy Limited v Commissioner of CGST & C. Ex., Durgapur [2019 (4) TMI 1537 - Cestat Kolkata], it was held as under:
“It is my considered view that to establish the employer-employee relationship for the purposes of the remuneration/salary, the Resolution of the company should cover both, “the terms of appointment/hiring of the services of the individual and similarly it should also cover that in case of non-performance of the specified duties, the individual shall be fired and/or his appointment would be terminated”. In short, to establish the employer-employee relationship, the clause of hiring and firing are an essential ingredient without which it cannot be construed whether the individual is the Promoter/Director or an employee Director.”
Different types of Directors & their Roles
There are different kinds of directors that a company can appoint. Broadly they can be divided into two categories – executive directors and non- executive directors. Executive directors are the ones who basically are involved in the day to day execution of the affairs of the Company and include whole time directors, managing directors, etc. whereas non-executive directors include independent director, nominee director etc. The executive directors of a company receive remuneration and may be considered in full time employment of the company.
The non-executive directors are generally the ones who are professionally involved merely in broad business of the Company and do not involve into the day to day activities. These non-executive directors attend the board meetings and receive sitting fees or commission for providing services to the company or body corporate.
Legal position in Erstwhile Service Tax Regime
The similar entry was also covered under reverse charge under service tax regime. The CBIC (the CBEC) vide Letter No. F. No 354/127/2012-TRU dated 27-07-2012 in para 7 clarified as follows in this regard:
7. Services of a director on the board of a company have now become taxable. A director may be appointed either in an individual capacity or to represent an entity (including government) who has either invested in the company or is otherwise authorized to nominate a director. When a director receives payment in his personal capacity, the same is liable to be taxed in the hands of the director. However, where the fee is charged by the entity appointing the director and is paid to such entity, the services shall be deemed to be supplied by such an entity and not by the individual director. Thus, in the case of Govt. nominees, the services shall be deemed to be provided by the Govt. and liable to be taxed under the exclusion sub- (iv) of clause (a) of section 66D of the Finance Act, 1994 i.e. support services by Government to business. Such services are liable to be taxed on reverse charge basis.
Thus, basis above, since the service provided by director in his personal capacity, the director remuneration paid by company should not be liable to tax under reverse charge. It would be treated as part of employment contract. No company under service tax regime paid tax under reverse charge on director remuneration while similar entry was there in erstwhile regime also.
Further, CBIC (then CBEC) issued Circular No. 115/09/2009 – ST dated 31-07-2009, whereby it was clarified in para 3 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.
Furthermore, in the case of M/s. Allied Blenders and Distillers Pvt. Ltd. Vs. CCE, Aurangabad [2019 (1) TMI 433] - Cestat Mumbai observed and held that the Appellant have placed on record the Form-16 issued by the appellant indicating deduction of income tax at source on the salary paid to each of the Directors. Besides, the appellant had also produced the contribution made to the Employees Provident Fund for each of the Directors, as required in case of other employees under the relevant Laws. Similarly, the Form-32 as required to be filed under the Companies Act, with the Registrar of companies, the four directors are shown as executive directors indicating that they are employees of the company.
It is the agreement between the employer i.e. company and the Director would reveal the exact relationship between them. In the present case, no such agreement exists between the employer and the Directors, hence there exists no employer-employee relationship.
All the necessary deductions on account of Provident Fund, Professional Tax and TDS under Section 192 of the Income Tax Act are made as applicable; also they were issuing Form-16 like it is issued to all other employees. Even in the salary return filed by the appellant company before the Income Tax authorities, the director’s names have been included. The company does not pay the director’s sitting fee to any of the directors. To discredit the said statement, no contrary evidence was produced by the Revenue to establish that the directors are not involved in the day to day function of the Company, but participate only in Board Meetings and consequently paid remuneration.
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.
Appeal allowed - decided in favor of appellant.
Legal position in Income Tax Law
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.
The said remuneration received is in lieu of managing the affairs of the company in the capacity of employee and taxed as salary in hands of directors.
Also, the remuneration paid to the directors is assessed under the head “Income from Salary” by Department of Income Tax.
Non-Executive Directors are not entitled to remuneration but are subject to payment of Sitting Fees. As far as Director Sitting Fees paid is concerned, the same is liable for deduction under section 194J and considered as professional fees and not Salary.
The view upheld by Hon’ble Advance Ruling Authority in M/s. Alcon Consulting Engineers (India) Pvt. Ltd. [2019 (10) TMI 793] and M/s Clay Craft India Private Limited [RAJ/AAR/2019-20/33] seem to be flawed as they have ignored the fact that the directors can also work in the capacity of the employees of the company and the remuneration in respect of such services may be governed by clause 1 of Schedule III to Sec 7 of CGST Act.
Thus, any remuneration received by a director in any capacity other than employee is exigible to GST. Schedule III of CGST Act, 2017 interalia amongst others provides for employee services as transaction which are neither considered as supply of goods or supply of service. The various positions where a director draws remuneration for employee services are not exigible to the levy of GST, while in all other cases, it shall be exigible to GST.
Further, services in the capacity of a director shall only be exigible to GST under reverse charge mechanism. Services of a person in capacity of an employee shall be outside the ambit of GST. In authors view, a director can also rent his shop to Company but then this entry cannot cover that service also. Since there are numerous services which a person can give to company including rental, right to use IPR, renting of tangible asset, etc. and thus, the terms services by a director cannot be presumed to include person’s other services. Any other services of a person (who is a director) in a capacity other than director like rental etc. may be chargeable to GST and that too under forward charge.