The Rajasthan Appellate Authority of Advance Ruling (AAAR) in its recent ruling in the case of M/s Clay Craft (India) Pvt. Ltd. has overruled the controversial ruling of AAR and has held that the Director’s remuneration declared as Salaries and subjected to TDS under Section 192 of the Income Tax Act, 1961 are not subject to GST.
Facts of the Case:
- The appellant, M/s. Clay Craft (India) Pvt. Ltd. is engaged in the manufacture of bone China Crockery, Transfer Sheet Decalcomania, other Utensils Item and Moulds and Die.
- Presently, the Board of Directors of the appellant company consists of 6 directors. It has been submitted that all the Directors are performing all the duties and responsibilities and duties as required under the laws.
- However along with that these all directors are also working in the company at different level of management in the company and each one of them is holding charge of procurement of raw material, production, quality checks, dispatch, accounting In other words, they are also working as an employee of the company for which they are being compensated by the company by way of regular salary and other allowances as per the company policy and as per their employment contract.
- As per the appellant, these Directors are treated at par with any other employee of the company as far as their employment is concerned.
- The company is deducting TDS on their salary and PF laws are also applicable to their service. Therefore, as per appellant for all practical purposes, these directors are the employees of the company and are working as such besides being Directors of the company.
Issue on which Ruling was sought:
The applicant sought the advance ruling on the issue of whether GST is payable under Reverse Charge Mechanism (RCM) on the salary paid to the Director of the company as per employment contract, after deduction of TDS as well as PF.
Controversial Ruling of AAR:
The Rajasthan AAR vide its order dated 20.02.2020 held that the consideration paid to the Directors by the applicant company will attract GST under reverse charge mechanism 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 CGST Act, 2017.
This ruling was a controversial one as same did not distinguish between the whole time / executive Directors to whom salary is paid and tax is deducted under Section 192 of the Income Tax Act, 1961 and nominee / independent / non-executive Directors to which payments made are subjected to TDS under Section 194J of the Income Tax Act, 1961.
Aggrieved by the order of AAR, the Appellant preferred the current appeal before the Rajasthan AAAR.
Ruling of AAR set right by AAAR:
The AAR noted that vide Circular No. 140/10/20-GST dated 10.06.2020 it has been clarified by CBIC that (i) remuneration paid by companies to the independent directors or those directors who are not employee of the said company is taxable in hands of the company, on reverse charge basis; and (ii) part of Director’s remuneration which are declared as “Salaries‟ in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.
Further the AAR also noted that at para 5.4 of above cited Circular, it is further clarified vide said CBIC Circular that the part of employee Director’s remuneration which is declared separately other than „salaries‟ in the Company’s accounts and subjected to TDS under Section 194J of the IT Act as Fees for professional or Technical Services shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable. Further, in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the Company, is liable to discharge the applicable GST on it on reverse charge basis.
In view of above deliberations the coram consisting of Pramod Kumar Singh and Dr. Preetan B. Yashwant ruled that remuneation, if any, paid by the appellant to the independent directors or those directors who are not the employee of the appellant is taxable in hands of the appellant, on a reverse charge basis.
The AAAR further clarified that the part of Director’s remuneration which are declared as Salaries in the books of the appellant and subjected to TDS under Section 192 of the Income Tax Act, are not taxable being consideration for services by an employee to the employer in the course of or in relation to his employment in terms of Schedule III of the CGST Act, 2017.
The AAAR further adjudged in its order that the part of employee Director’s remuneration which are declared separately other than “salaries” in the appellant’s accounts and subjected to TDS as Fees for professional or Technical Services shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and is therefore, taxable and in terms of notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017, the recipient of the said services i.e. the appellant, is liable to discharge the applicable GST on it on reverse charge basis.
Also Read: All about Reverse Charge Mechanism (RCM) on Director remuneration / Services
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
