REVERSE CHARGE FOR DIRECTORS SERVICES

[Dr. Sanjiv Agarwal]

Service Tax is payable under reverse charge by the companies who receive services from their directors who are not in employment in terms of Rule 2(i)(d)(EE) of Service Tax Rules and Entry No. 5A of Notification No. 30/2012-ST dated 20.06.2012 (as amended by Notification No. 45 and 46/2012-ST dated 7.8.2012).

Only individuals can become directors as per section 253 of the Companies Act, 1956, No body corporate, association or firm shall be appointed director of a company and only an individual shall be so appointed. However, individuals can be nominees of any company, association or any other entity including Government.

Like in case of any Indian director, the services of any foreign director are also liable to Service Tax which shall be discharged by the company itself under reverse charge mechanism.

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.

In the case of Government nominees, the services shall be deemed to be provided by the Government and liable to be taxed under the exclusion sub-clause (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.

During the period from 1.7.2012 to 6.8.2012 (both days inclusive), the liability to pay Service Tax has to be discharged by the concerned director himself and not by the company. However, he/she shall be eligible for threshold exemption of ? 10 lakh in terms of Notification No. 33/2012-ST dated 20.06.2012.

Entire amount (100 per cent) of Service Tax shall be payable by the company under reverse charge mechanism. Companies shall have to register themselves under service tax before making payment of service tax on services provided by directors under reverse charge mechanism.

Where a person is a director in more than one company, whether all the companies in which he/she is a director, though the service provider is the same person (non-employed director himself), all the companies in which he is a director and are paying remuneration to him, shall be liable in their respective capacity to pay service tax on director's remuneration on reverse charge basis. This would also apply to subsidiary companies of the holding company.

The word 'company' should mean the company as defined in the Companies Act, 1956/ 2013. Director of a cooperative bank shall not be covered under reverse charge as cooperatives are not companies. In such case, directors themselves shall be liable to discharge Service Tax liability.

On a director requesting the company to pay Service Tax himself rather than the company paying under reverse charge mechanism, nobody stops him from requesting the company but the law, as it stands is very clear. Service Tax has to be paid by the person liable to pay in terms of section 68(1) and 68(2) and there cannot be any deviation from the statutory provisions. However, there have been instances where Tribunal have held that Service Tax cannot be demanded twice on the same service [Refer Navyug Alloys Pvt. Ltd. v. CCE & C 2008 (8) TMI 100 - CESTAT AHEMDABAD; Invincible Security Services v. CCE 2008 (9) TMI 122 - CESTAT NEW DELHI.

In Angiplast (P.) Ltd. v. CST, Ahmedabad 2013 (4) TMI 552 - CESTAT AHMEDABAD, where assessee paid freight charges but did not discharge service tax liability under reverse charge and enclosed requisite certificates indicating the discharge of liability by service provider and balance by themselves, it was held that since the providers had categorically stated their liability and mentioned their service tax registration number, revenue was expected to call for details from the concerned authorities Department cannot shift the entire blame on the assessee. Having not done so, assessee could not be made liable to pay any service tax and demand was set aside. [Navyug Alloys Pvt. Ltd. v. CCE & C 2008 (8) TMI 100 - CESTAT AHEMDABAD followed].

W.e.f. 11.07.2014, directors of body corporate would also be covered in terms of changes made in Service Tax Rules vide Notification No. 9/2014-ST dated 11.07.2014 and by Notification No.10/2014-ST dated 11.07.2014 in Notification No. 30/2012-ST dated 20.06.2012.

Body corporate has been defined in Companies Act, 1956 / 2013. Accordingly, w.e.f. 11.07.2014, services of directors of body corporate to body corporate shall also be covered under reverse charge mechanism.

Discussions to this article

[ravichandran karapattu subrahmanian]

The entire article des not discuss a most important aspect of remuneration by way of "sitting fees" paid / payable to directors for attending meetings of Board or meetings of committees. Sitting fees or commission on profits will be the only remuneration such non executive directors will be receiving. The 100% RCM will apply to payment of sitting fees / commission. And another factor important in this respect is to ensure that reimbursements are taken into account. Directors are normally entitled to reimbursement of all out of pocket expenses including travel, conveyance, food and stay.

[M.S.SUHAS MUNDARAGI]

Please elaborate the payment of service tax on Remuneration paid to a Managing Director or a whole time executive director. Whether service tax RCM applicable to them also. According to me it should not be applicable as they are full time employee's of the company.

Suhas

[Dr. Sanjiv Agarwal]

Dear Suhas ji ,

Service (Section 65B(44)) means an activity carried out by a person for another for consideration , and includes a declared service , but shall not include a provision of service by an employee to the employer in the course of or in relation to his employment.

It is pertinent to note that the whole time directors, managing directors and executive directors are engaged in managing day to day functions of the company or the body corporate, therefore , they can be considered as employees of the company. Furthermore , the fact that the TDS is deducted under section 192 of Income Tax Act , 1961 on the salary / remuneration paid to the whole time directors / managing directors / executive directors is conclusive evidence that the amount paid as remuneration is nothing but consideration paid for services rendered by such directors in the capacity of employee of the company. Furthermore , the remuneration received by such directors is shown in their Income Tax Returns under the head 'Income from Salary' also proves the fact that the amount received is in lieu of their employment with the company. As such , when CBDT , being one of the wing of the Government Department is accepting the amount paid to such directors as salary in lieu of employment , the other wing of the Government Department i.e., CBEC cannot take a contrary stand to levy service tax on the same. Therefore , the said activity is outside the purview of the definition of service and consequently no service tax is leviable on the same.

Furthermore , when an activity is not within the ambit of service, the question of reverse charge mechanism does not arise .

Thanks & Regards ,

CA Neha Somani

[Dr. Sanjiv Agarwal]

Dear Ravi ji,

Sitting fees / commission etc. payable to non – executive directors and the whole time directors / managing directors / executive directors is leviable to service tax. Companies should pay service tax on the sitting fees / commission and other amounts paid to the directors which do not form part of the salary because the company is entitled to claim CENVAT credit of the amount paid as service tax under reverse charge mechanism on the basis of challan. As such, there is no loss to the company in paying service tax and instead , non- payment of service tax may attract interest and penal consequences.

Thanks & Regards ,

CA Neha Somani

[ravichandran karapattu subrahmanian]

thanks for the clarification, Dr.Sanjiv Agarwalji.

Still service tax on reimbursement of expenses remains unanswered. In my opinion, such reimbursements would also trigger the same provisions and 100% of the service tax must be paid by the company under the RCM only.