2021 (1) TMI 849 - AAAR - GST

Remuneration under IT Act: Salaries not taxable, fees for services taxable under GST

The appellate authority concluded that remuneration declared as 'Salaries' and subjected to TDS under Section 192 of the IT Act is not taxable under GST. ... Levy of GST - Reverse Charge Mechanism - salary paid to Director of the company who is paid salary as per employment contract, after deduction of TDS as well as PF - situation if the Director also is a part time Director in other company also - Challenge to AAR decision - HELD THAT:- The Rajasthan Authority for Advance Ruling (AAR) in IN RE: M/S. CLAY CRAFT INDIA PVT. LTD., [2020 (4) TMI 228 - AUTHORITY FOR ADVANCE RULING RAJASTHAN] pronounced that the consideration paid to the Directors by the applicant company will attract GST under reverse charge mechanism and the situation will remain the same if the director is also a part time director in another company. The CBIC has recently issued a Circular No. 140/10/2020 - GST dated 10.06.2020 under File No. CBEC-20/10/05/2020 -GST and clarified the issue in appeal. It has been clarified that (i) remuneration paid by companies to the independent directors or those directors who are not the employee of the said company is taxable in hands of the company, on reverse charge basis; and (ii) the 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 - it is further clarified 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. The remuneration, 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 reverse charge basis. Further, 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 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. The part of employee Director’s remuneration which is declared separately other than “salaries” in the appellant’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 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. Issues Involved:1. Leviability of GST under Reverse Charge Mechanism (RCM) on salary paid to Directors.2. Applicability of GST if the Director is a part-time Director in another company.Detailed Analysis:1. Leviability of GST under Reverse Charge Mechanism (RCM) on salary paid to Directors:The appellant, M/s. Clay Craft (India) Pvt. Ltd., sought clarification on whether GST is payable under RCM on the salary paid to Directors who are also employees of the company. The Rajasthan Authority for Advance Ruling (AAR) ruled that the consideration paid to Directors attracts GST under RCM as per entry No. 6 of Notification No. 13/2017-Central Tax (Rate) dated 28.06.2017. The appellant contested this ruling, arguing that Directors working full-time under an employment contract should be considered employees, and their salaries should not attract GST under RCM.The appellant cited definitions and judicial precedents to support their claim that Directors can be employees. They referenced the distinction between 'contract of service' (employment) and 'contract for service' (independent contractor) upheld by the Supreme Court in Indian Medical Association vs V.P. Shantha. They also pointed to similar provisions under the erstwhile Service Tax regime and argued that the legislative intent under GST should be consistent with Service Tax, where salaries to whole-time Directors were not taxed under RCM.The appellant highlighted a judgment from the CESTAT Mumbai in Rent Works India (P) Ltd. Vs Commissioner of C. Ex., Mumbai, where remuneration paid to a Director was treated as salary by the Income Tax Department and not taxed under Service Tax. They argued that the same principle should apply under GST, emphasizing that the same Ministry (Ministry of Finance) should not take contradictory positions.During the personal hearing, the appellant relied on CBIC’s Circular No. 140/10/2020 - GST dated 10.06.2020, which clarified that remuneration declared as 'Salaries' and subjected to TDS under Section 192 of the IT Act is not taxable under GST as it is considered a service by an employee to the employer.2. Applicability of GST if the Director is a part-time Director in another company:The AAR ruled that the situation remains the same even if the Director is a part-time Director in another company, and GST would still be applicable under RCM. The appellant did not provide specific arguments against this part of the ruling, focusing instead on the broader issue of whether Directors’ salaries should be subject to GST under RCM.Discussion and Findings:The appellate authority reviewed the appeal, the AAR ruling, and the CBIC Circular. It was clarified that:- Remuneration paid to independent Directors or those not employed by the company is taxable under RCM.- Remuneration declared as 'Salaries' in the company’s books and subjected to TDS under Section 192 of the IT Act is not taxable under GST.- Remuneration declared separately as fees for professional or technical services and subjected to TDS under Section 194J of the IT Act is taxable under GST, with the company liable to pay GST on RCM basis.Conclusion:The appellate authority concluded that the part of Directors’ remuneration declared as 'Salaries' and subjected to TDS under Section 192 is not taxable under GST. However, remuneration declared as fees for professional or technical services and subjected to TDS under Section 194J is taxable under GST on RCM basis. The appeal was disposed of in these terms.