Services by employee to employer is outside the ambit of taxable event and not chargeable to GST: Schedule-III of the Central Goods and Services Tax Act, 2017 provides that services by an employee to the employer in the course of or in relation to his employment shall not be treated as supply, and thus no GST would be applicable.

Directors services to company or body corporate notified for RCM: Under the Reverse Charge Mechanism, a company or a body corporate is liable to pay GST under the reverse charge in respect of the services received from the director.

In a recent ruling,the Authority of Advance Ruling, Rajasthan (‘AAR’) in case of Clay Craft India Pvt. Ltd. held that the GST shall be chargeable on the remuneration paid or payable to the directors. The Authority has only taken note of the RCM, and outrightly denied to treat directors as employees of the company. This ruling, thus, arises a moot question – Whether GST is chargeable on the consideration paid or payable for the services rendered by every director?

ADVANCE RULINGS ON THE IMPUGNED ISSUE:
The applicant has raised the following questions before the Rajasthan AAR:
a)  Whether GST is payable on a reverse charge basis on the salary paid to the director of the company as per the contract?
b)  Whether GST applicability will differ if the said director is also a part-time director in any other company?

The applicant submitted that GST will not apply on the remuneration paid to directors as they are the employees and they are given salaries along with benefits as per the policy decided by the company for its employees, thus, covered under Schedule-III.
 On the contrary, the department has simply provided that the director is not the employee of the company and therefore, the amount paid to them will not be covered under Schedule-III.

The AAR held that directors are not the employees of the company, consequently, GST would be applicable. It emphasisedthat the director is a supplier of services and the applicant (company) is the recipient of such services. Services rendered by the director to the company for which the consideration is paid to them, under any head, is chargeable to GST on reverse charge basis. Therefore, in respect of both the questions raised above, the applicant will liable to pay GST.

A similar view was taken by the Karnataka AAR in the case of Alcon Consulting Engineers (India) (P.) Ltd. The authority has observed that services provided by the Directors to the company are not covered under Schedule-III as the director is not the employee of the company.

Analysis:

• The taxability under GST legislation should be determined based on the principle of whether a director is an employee of a company.

• Notably, the GST legislation has not defined the terms ‘director’ and ‘employee’.

• Therefore, a reference to other laws should be made. As per Section 2(34) of the Companies Act, 2013 ‘director’ means a director appointed to the Board of a company.Also, some directors are nominated by the Financial Institutions/Foreign Collaborators/banks/investors to form part of the board of directors. The Board has also powers to fill casual vacancies and appoint additional directors. All these directors collectively form a Board. The Board of Directors is the controlling authority of the company under the Companies Act, 2013.

Executive and Non-Executive Directors Directors who are in the whole-time employment or those who are entrusted with day-to-day operations of the company are termed as ‘Executive Directors’. Other directors are non-executive directors, who are from outside the company. Such non- executive directors do not take part in the day-to-day activities of the company and do not have the knowledge about the routine operations of the company. They only attend the meetings of the board of directors or its committees and thus, work only at a periodic interval on a part-time basis. Thus, it can be inferred that non-executive directors, who are not entrusted with day-to-day operations, cannot be treated as an employee of the company.

Independent directors As per Section 149(6) of the Companies Act, 2013, an ‘independent director’ has been defined as a director not being a managing director or a whole-time director or a nominee director. The selection of independent director shall be done by the board who is independent of the company management. Moreover, they have to pass/clear some examination as specified by the Ministry of Corporate Affairs. An independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business. The Independent directors do not work under the control and supervision of the company and therefore it can be inferred that independent directors are not the employees of the company.

Remuneration to directors Directors who are in whole-time employment of the company are termed as ‘whole- time directors’. Some directors may be appointed as ‘Managing/Whole-time Director’ who will be entitled to monthly remuneration.It may be noted that a ‘Managing Director’ need not necessarily be a ‘Whole-time Director’. It is possible and permissible to appoint a director as ‘Managing Director’ though he may not be in full-time employment. As per Section 2(78) of the Companies Act, 2013, ‘remuneration’ means any money or its equivalent given or passed to any person for services rendered by him and includes perquisites as defined under the Income-tax Act. Section 197 read withSchedule V of the Companies Act contains the provision for the computation and payment of director’s remuneration.

Payment of Sitting fees

Directors (other than whole-time directors and Managing Director) work only on a part-time basis. These directors are ‘Non Executive Directors’. Normally, they attend the meetings of Board or its committees. These directors get fees for attending the Board meetings or Committee meetings. But a managing director or a whole-time director, who is getting remuneration, is not entitled to sitting fee. Even if the sitting fee is paid, it will be treated as ‘other allowance’ and the overall salary will be subject to the limit of managerial remuneration specified in Schedule-V of the Companies Act, 2013.

Comments Though the Companies Act, 2013 permits payment of remuneration to both Executive and Non-Executive Directors, but directors who are in whole-time employment or those who are entrusted with day-to-day operations of the company are termed as ‘Executive Directors’. These directors are treated as employees. Sitting fees is paid to the directors, not being whole-time directors and managing director, and they are not be considered as employees as they are entrusted with the responsibilities for the day-to-day operations.

Provisions of the Income-tax Act

1. To tax any amount under the head ‘Salary’ there must be an existence of employee and employer relationship. Notably under the Income-tax Act, 1961 there are no pre- defined rules or principle to decide whether directors are treated as an employee of the company or not. It provides that if a person is treated as an employee, his remuneration will be taxable under the head salary and tax would be deducted under Section 192.

2. Therefore, before a payment can be taxed as salary, the relationship of employer and employee or master and servant must be established.

3. Taxability of an income under the head ‘Salary’ pre-requisites existence of employee and employer relationship. Before a payment can be taxed as salary, the relationship of employer and employee or master and servant must be established.

4. The judiciary has laid down various principles for determining the relationships of employer and employee. In the absence of the employer-employee relationship, the income shall be assessable either as business income or income from other sources.

5. If a person has to work under the direct control and supervision of the principal and he has no discretion of his own in the performance of his duties, he is deemed to be an employee and the remuneration payable to him in such a case is chargeable to tax under the head salaries. On the other hand, if principal exercises only a supervisory control in respect of work entrusted to the person and he has wide discretion of his own in the execution of the policies of the principal, the presumption is that such person is not an employee.

6. The remuneration payable to such person in such a case is liable to be taxed under the head ‘Profits and gains of business or profession’.

7. The nature of a director’s employment may be determined by the Articles of Association of a company and the service agreement, if any, under which a contractual relationship between the director and the company has been brought about.To decide the question of whether a director is an employee of the company or not, one has to find out as to whether the relationship of master and servant exists between the company and the director. IfArticles of the company confers a specific right to the company to remove any director before the expiration of his period of office by an extraordinary resolution and if he were so removed he would automatically be dismissed from the office of the managing director, the director could be considered as an employee of the company.

8. Example, if a company is carrying on business and an individual is employed to manage its affairs in terms of its Articles and the service agreement, and his employment can be terminated if his work is not satisfactory, he shall be treated as an employee of the company.

9. If engagement for any work is incidental to the exercise of the profession, the gains arising from such engagement shall not be chargeable to tax under the head Salaries but under the head ‘Profits and gains from business or profession’. Thus, if he is not treated as an employee, any remuneration or fees or commission by whatever name called will be taxable under the head ‘Profit and gains from business or profession’ and tax would be deducted under Section 194J.

10. After analysing above mentioned provisions of Income-tax Act and judicial decisions, it can be inferred that if the relationship of master and servant exists between the company and the director, only then a director can be treated as an employee. It is immaterial whether the director is the Managing director or Independent director.

Provisions of the erstwhile service-tax law Even in the erstwhile 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 consultancyservices.

Judicial Pronouncements

a) Allied Blenders and Distillers (P.) Ltd. v. CCE & ST7 It was held that where assessee-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 assessee was not required to discharge service tax on remuneration paid to the directors. b) Nrb Industrial Bearings Pvt. Ltd Versus CCE & ST8 Similar view has been taken in this case as well. In this case, 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.

Departmental Circulars

a)  The CBIC clarified that 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.

b)  The MCA issued a circular about 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.

Conclusion: Based on the principles and jurisprudences cited above under Companies Act, Income-tax Act and erstwhile Service tax regime, it can be concluded that the consideration (except sitting fees) paid to the directors engaged in whole time employment with the company will be treated as part of the salary, and will be excluded from the ambit of GST. The sitting fees paid or payable to the independent directors should be brought within the ambit of GST. It appears that the AAR, Rajasthan had not evaluated the issue from the view-point of such principles. It just placed its reliance on the notification issued under the RCM. With due respect, this ruling requires re-consideration. Taxability of director’s remuneration under the GST should be determined on the basis of the fact whether the director is involved in routine work of management or not.

Source: Editorial team of www.taxmann.com