17 November 2014
I furnish my views reg. S.Tax on Director’s service for guidance, views, comments and suggestions from learned experts.
Issue: Director’s service provided to company and whether the same is taxable? If, yes whether taxability is due to implementation of Negative List of Service regime or due to Reverse Charge Mechanism?
(A) Types of Directors and how they can serve company:
(1) Whole time director: Wherein he is duty bound with dedication for overall routine functions of the company including company’s growth, legal matter, representation, financial interest, technical expertise and many more. Generally, such directors have substantial interest in company’s future. In this method Director is termed as employee of the company and Employer-Employee relation sheep exists.
(2) Part-time/Non-sitting/visiting Director: This type of directors is by ex-officio nominated or experts in some field, having specific/limited function/ responsibilities and their payment terms also are different than whole time Directors. They are given remuneration some specific amount and may be consisting of some variable amount based on their frequency of attending meeting, advise and linked with their performance or company’s performance. For example, (a) Sale/profit based commission: In this method, Director can be termed as Commission agent of the company which is taxable under “Business Auxiliary Service”. (b) Advise based(may linked with sale/profit): In this method, Director may be termed as Management Consultant providing Management Consultant Service (3) Personal Capacity: There may be a case that any director, other than his nominated function, may provide any service in personal capacity For example, any service which is required to availed from market and any director is competent to provide the same, he may provide such service and raise bill in his personal capacity as individual. In such case, such amount paid him will not reflected in remuneration to the director by again individual’s party ledger.
(B) Taxability is not affected by Negative List Regime as even before that service as mentioned in Para A(2) and A(3) was taxable in Service Tax Net and CBEC have issued two circulars on the subject. CBE&C, vide letter No. 324/Comm(ST)/2008, dated 1-12-2008 [20 STT 20 (St)], has clarified that commission paid by a company to its directors (even if linked with performance or with financial results of the company) is nothing but remuneration paid by employer to employee. The relationship between employer and employee is distinct from relationship between a service receiver and service provider. Hence, so long as activities performed are duties within the framework of terms of the employment, amount paid by employer to employee, even if termed as commission, would not be treated as commission under definition of Business Auxiliary Service and service tax would not be leviable. This view has been reiterated and confirmed vide CBE&C Circular No. 115/09/2009-ST, dated 31-7-2009.
As held in case of Usha Martin Industries Vs. CCE, Patna [1997 (94) E.L.T. 460 (S.C.)] and Dhiren Chemical Industries Vs. Collector Of C. Ex., Vadodara [2002 (139) E.L.T. 3 (S.C.)], Departmental Circular is binding on field formation. In case, the same are contradictory to law but beneficiary to trade, the same are binding until the same are withdrawn/rescinded. Both the above referred Circulars are still live.
(C) Taxability is not affected by Reverse Charge Mechanism: Insertion of Entry 5A in Table given under Notification 30/2012-ST has nothing to do with taxability as the aspect was already existed before Negative List Regime or Reverse Charge Mechanism. Notification 30/2012-ST read with Section 68(2), STR 2(1)(d), has only changed burden of service tax payment from service provider to service receiver.
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