Service Tax on service provided by Director to the company

[Kunal Pawar]

If Director gives his premises on rent to the company and receives some consideration. Whether the Service Tax is payable by the company under Reverse Charge Mechanism being Service provided by Director to the company or whether Director has to pay Service Tax on the rent income under Renting of Immovable Property category?

[Rajagopalan Ranganathan]

Sir,

Renting of immovable property is a 'declared Service' as per Section 66 E of finance Act, 1994. Services by way of renting of residential dwelling for use as residence is under Negative List vide clause (m) of Section 66 D of finance Act, 1994. Therefore if a Director rents out his building to the Company in which he is a Director and the same is used as residence of the employee of the Company the same will not attract service tax. But there is another view. Since the Director rents out his building to the company which is a commercial establishment and the same is used for commercial purpose then the rent payable is liable to service tax. Therefore whether service tax is leviable or not depends upon the clauses of the agreement entered into between the Director and the Company.

As per Sl. No. 5 A of Notification No. 30/2012-ST dated 20.6.2012 (With effect from 1.74.2012) in respect of services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate Service tax is payable under reverse charge mechanism (RCM) @100% by the company or the body corporate. Since renting of immovable property by the Director the Company amounts to renting of immovable property service service tax on the same will be under RCM by the Company. This is my opinion.

[Ganeshan Kalyani]

Under Notification No. 30/2012 dated 20.06.2012 the service in respect of service provided or agreed to be provided by a director of a company or a body corporate to the said company or a body corporate the service tax is payable by company under reverse charge on 100% ratio. However the nature of services should be provided or not to be provided under this category is not mentioned in the notification. Hence as above the service provided by a Director of a company by renting out premises to the said company the service tax on the service shall be paid by the company.

[Mahir S]

Director will have to pay service tax on the rent income under Renting of Immovable Property Category.

[Ganeshan Kalyani]

Dear Mahir sir how do you justify on your stand. The notification does not specifically defined what service should Director of a company or body corporate should provide and therefore it is logical to assume that service provided by a Director to a company is taxable in the hands of company under RCM. Please discuss.

[KASTURI SETHI]

I agree with reply dated 26.11.15 of Sh.Rajagopalan Ranganathan and replies dated 26.11.15 and 27.11.15 of Sh.Ganeshan Kalyani.

[CA Akash Phophalia]

Since the reverse charge is applicable on the services provided by the director to the company or body corporate, therefore, I too am of the view that in this case, service tax is payable by the company under reverse charge. We are following this practice.

[KASTURI SETHI]

Since another highly qualified person, namely, Sh.C.A.Akash Phophalia has supported the majority view, now not even an iota of doubt on this issue.

[YAGAY andSUN]

Dear Kunal,

We also endorse the submissions/views/inputs of the majority in this matter. Directors are not under statutory obligation to pay the Service Tax on this matter.

Regards,

YAGAY and SUN

(Management, Business and Indirect Tax Consultants)

[KASTURI SETHI]

M/s.YAGAY and SUN,

Sirs,

A legal luminary like you have supported our views. It matters a lot to us. We feel elated.

[Mahir S]

Just to inform the esteemed experts not to get too excited as I shall be posting my further reply tomorrow on the above topic and shall stand to my views expressed in my above reply dated 26.11.2015 .

[Ganeshan Kalyani]

We welcome your views Sir.

[KASTURI SETHI]

Sh.Mahir S Ji,

If you have legal force in support of your contention, you are welcome. So I am open to accept your views if the same are in letter and spirit of law. No room for 'but' and 'if'.

[Mahir S]

Respected Friends,

I would like to discuss and elaborate 03 points on the issue as under :-

(1) In the query raised above, it has not been confirmed about the Post of the Director and Nature of work undertaken by the Director. As per Section 65B (44) service provided by an employee to his employer is not covered by the meaning of Services. So if services are provided by the director in capacity of employee, then the same are not liable to service tax.

The Directors (generally whole time / managing / executive directors) who are under contractual employment with the company and receive salary or remuneration from the company will not be covered as they shall be considered as employees of the company.

Therefore, in such cases, renting or premises shall also not be chargeable to service tax under reverse charge mechanism. Hence, the contention that service tax applicable on Directors is not correct as much as that contracted employed directors shall be exempt for payment of service tax under reverse charge mechanism for the services provided by them to company.

(2) IIf there is a written agreement that various services including services for providing his own premises on rent is provided by directors, then such services may be chargeable to service tax under Reverse Charge Mechanism, otherwise Director himself shall have to pay tax on the rent income.

It can surely be assumed that such condition of renting of premise by Director will not be available in the terms of contract between the Director and Company. Even otherwise, the company shall have to prove as to how such renting of premise can be termed as service being provided by Director to company.

Therefore, in such cases, the services of providing premises on rent may not fall under the purview of payment of service tax under reverse charge mechanism.

(3) The moot question in the query is regarding payment of service tax under reverse charge for the services provided by Directors to the Company.

Therefore, another question simultaneously arises as to what are the services generally provided by Directors. Since all the services provided by directors in their capacity of a director shall be covered under scope of Service Tax, hence the gross charges payable to them by the company shall be liable to Service Tax. It may be in the form of any one or more of the following :-

1. sitting fee
2. commission
3. Bonus
4. share in profit
5. benefit in form of ESOPs etc.
6. Company car/ travel reimbursements

Hence, in above cases, the services are being provided by Directors in their capacity of a Director and therefore liable for payment of service tax by company under reverse charge mechanism.

However, there are also various other services which are being provided by Directors to Company but such services do not fall in their capacity of a Director.

The following amount/charges received by the Directors from the Company will not attract Service Tax as such amounts do not represent service provided by directors, as detailed below :-

1. interest on loan by director to the company
2. dividend on shares
3. Other professional charges on account of services not rendered as a Director (in professional capacity).

In view of above, the charges paid by Company to Directors for such professional service like commission/brokerage given for finding a premise for company, or rather going a step further and saying that – providing Director’s premise on rent for company, shall not fall under the category of service being provided in the capacity of Director.

Such services provided by Director are not services provided in their capacity of a Director but in their professional capacity. Therefore, company is not liable to pay service tax under reverse charge mechanism for such professional charges paid to Directors, such as rent paid to Director every month by the company for giving their premise on rent.

Therefore, the company is liable to pay Service Tax under RCM only on those services which are provided by the director in the capacity of director. When your company pays rent to director, he receives it in the capacity of the Owner of property and not for being the Director of company. On this service, director will be liable to pay ST on his own, subject to fulfillment of other required conditions.

These are my personal opinion and I stand to my views, as Always…

[Ganeshan Kalyani]

First of all I would like to appreciate the reply submitted by Mahir sir. Further I would like to present my views as under:

Serial no. 5A of Notification 30/2012 dated 20.06.2012, represents as ''in respect of services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate''. The proportionate of service tax payable by a Director is 'NIL' and the Company shall pay service tax on 100% ratio.

Further as I already mentioned that the type of service a Director should provided is neither given in the notification nor any clarification is published by the department. Further in each of the services enumerated in the said notification one thing in commonly observed is that ' a provider of service should be an individual' and 'the receiver of service should be a body corporate' ;. Here, Director is an individual providing a service of renting of immovable property and company is a service receiver. Since the condition of the notification is fulfilling the service is rightly covered under reverse charge mechanism and therefore service tax is payable by company or body corporate.

Also, the motive behind renting of immovable property to a company is to support business by catering its need of want of immovable property for some business purpose. Otherwise there is no other motive of a Director to rent such property and earn from it. Thus it is logical to assume that the service provided by a Director falls within his capacity a Director and therefore a company or a body corporate should pay service tax under reverse charge mechanism.

[CA Akash Phophalia]

Dear Mahir Ji

You yourself has emphasized "in their capacity as director".

Kindly let us know form where this interpretation is obtained as the law is silent and simply stated that the services should be provided by the director. It no where states that the services should be provided in the capacity as director. We are not opposing you but we wish to brainwash ourselves with your precious views.

Humble Regards!!

CA Akash Phophalia

9799569294

[KASTURI SETHI]

I thought my friend Sh.Mahir S. would create a storm by his offbeat reply with legal backing (for which I was eagerly waiting for) but my dream has been shattered. Hence I fully support the views expressed in reply dated 1.12.2015 of Sh.Ganeshan Kalyani and in reply dated 1.12.2015 of Sh. Akash Phophalia C.A.

The views expressed by Sh.Mahir S are full of logical force but devoid of legal forceas also pointed by Sh.C.A.Akash Phophalia in his reply dated 1.12.2015. Logical force stands nowhere if it is not backed by legal force. Where the words, 'in the capacity of a director' exist in Notifications ? We cannot say it is implied. We are to go by law strictly and not by our logic, common sense, knowledge and wishful thinking, howsoever, strong it may be. We cannot move left or right beyond the literal meaning of the notification in question.Weare talking about what the present law says and what notifications say. We are talking about the legal position as on today itself.We are to interpret provisions of law strictly according to the literal meaning of language of law. We cannot interpret the message or meaning of any notification in our own way or as per sweet will. Note the language of the Notification No.45/2012-ST dated 7.8.12 and substituted by Notification No.10/14-ST dated 10.7.2014, it is ‘Services’ and Not ‘Service’ provided by a director. It means ALL services as a director especially in view of the fact that there is no exclusion clause and no mention of any nomenclature of service specifically. I do not feel need to add more as Sh.Ganeshan Kalyani and Sh.Akash Phophalia C.A have already sufficiently explained what I wanted to say.

Now if we read again all replies date wise we will find that we are on right tract from the day one. Note the last lines of the first reply dated 26.11.2015 of Sh.Rajagopalan Ranganathan.

 

AI Summary

Reverse charge mechanism: company may bear service tax when a director supplies services, subject to capacity and contract. Notification No. 30/2012 (Sl. 5A) shifts service tax liability to the company for services 'provided or agreed to be provided by a director,' which practitioners interpret to include letting immovable property to the company so that the company pays under Reverse Charge Mechanism, subject to exceptions where the director acts as an employee (employee exemption) or where premises are used as residential dwelling falling under the negative list; the contractual terms and the director's capacity are decisive factors.