Service tax on Directors' sitting fees

[Srivatsan Krishnamachari]

Dear Learned Friends,

As per Notification No:45/2012 Serial No:5 A services provided or agreed to be provided by a

director of a company to that said company is taxable under reverse charge mechanism (100%) Further vide Notification No:10/2014 another line is inserted 'in respect of services provided or agreed to be provided by a director of a company or body corporate to the said company or body corporate'

Obviously whole time directors of a company drawing their salary do not come under the purview of these notifications. It is also a practice generally found, particularly so in case of private limited companies that such whole time directors are paid 'sitting fees' also while attending the board meeting apart from their salaries and perks.Do these 'sitting fees' attract service tax under RCM. Kindly clarify.

Regards,

K.Srivatsan

[Madhukar N Hiregange]

Yes it would. Also where the director is a whole time director the RC would not apply.

[Madhukar N Hiregange]

Sorry reply was incomplete. Where a director is an WTD and getting salary there would be no RC even on the sitting fees.

[Srivatsan Krishnamachari]

Dear Shri. Hiregange,

I thank you Sir for the prompt response.

Regards,

K.Srivatsan

[Arun Kumar Singh]

Yes, service tax will be applicable for these payment under RCM.

[Rajagopalan Ranganathan]

Sir,

According to Section 65 B (44) (b) service provided by an employee to the employer during the course of employment will not be treated as service.

The distinction between employee and independent service provider like independent contractor, consultant, advisor etc., is that in the case of employee there is 'contract of service' and in the case of independent service provider, there is 'contract for service'.

The distinction between 'contract of service' and contract for service' has been fully upheld by Supreme Court (3 member Bench) in Indian Medical Association vs. V.P. Shantha [1995 (6) SCC 651] = 1995 (11) TMI 436 - SUPREME COURT stating that .'contract for service' implies a contract whereby one party undertakes to render services, for example, professional or technical services to or for other in the performance of which he is not subject to detailed direction and control but exercises professional or technical skill and use his own knowledge and discretion. However, a 'contract of service' implies a relationship of master and servant and involves an obligation to obey orders in the work to be performed and as to its mode and manner of performance.

As per Section 2 (94) of the Companies Act, 2013 (corresponding Explanation to section 269 of the Companies Act, 1956) 'whole time director includes a director in whole time employment of the company.

In view of the above, if the contract for appointment of the director is a 'contract of service', then sitting fees paid to him is not liable to service tax. Otherwise service tax is payable on the sitting fees by the company on reverse charge mechanism.

[Srivatsan Krishnamachari]

Dear Mr.Arun Kumar Singh and Mr.Rajagopalan Ranganathan,

Thank you gentlemen for your response.The distinction between a "A contract of Service and a "Contract for Service" is a vita one . A managing Director or a Whole time Director performs management functions as per the terms of appointment and so the services rendered by them to the company they are employed in are in the course of their appointments While going through notifications and circulars of yesteryears,I came across a Circular from CBEC Circular No:115/09/2009 Dated:31st July which makes it clear that the services provided by the whole time directors which may include a Managing director, to the company in the course of their employment are out side the purview of Service tax.

Regards,

K.Srivatsan

AI Summary

Service tax on directors' services: sitting fees may attract reverse charge unless within whole time employment exclusion. Sitting fees paid to directors are taxable under reverse charge unless the director is in whole time employment, because the employee services exclusion covers services rendered in the course of employment; thus where a director's appointment constitutes a contract of service, sitting fees are not subject to service tax.