Rcm on consultancy service provided by director to company

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Querist : Anonymous

Querist : Anonymous (Querist)

12 March 2016 Can you please clarify the position of law if the Director of a company is providing consultancy services to the company. Will it be covered in the reverse charge ambit?

Suresh Ramaswamy

Suresh Ramaswamy (Expert)
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12 March 2016 Any payment made to directors for their services are covered under reverse charge. This is the basic premise. The only exception is provided for services received from executive / whole time directors only on the ground that the directors are full time employees of the company. The services rendered by an employee to the employer is not within the ambit of service tax since the relationship of employer-employee is akin to master-servant.

From your query it is apparent that the director rendering the consultancy services is not a whole time or executive director. Hence, the service would be subject to service tax and the company is liable to pay the same under Reverse Charge Mechanism.

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Querist : Anonymous

Querist : Anonymous (Querist)

13 March 2016 Thanks sir for valuable information. I would like know, In my situation, here Director is whole time working with company as like employee do. Such Director having only 1% share in comapny . so what would be implications of that.

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Nilesh

Nilesh (Expert)
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14 March 2016 If you are issuing Form 16, then there is no question of service tax or if you deducting TDS under section 194J then it is recommended to pay service tax under RCM

Suresh Ramaswamy

Suresh Ramaswamy (Expert)
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15 March 2016 Since the Director is a whole time Director, he becomes an employee irrespective of whether he is paid a monthly salary or a percentage of profit. For Tax Deducted at Source for such directors the company would be issuing Form 16 pertaining to TDS from Salaries - in that case the employer employee relationship is established and no Service Tax would be payable under RCM

Querist : Anonymous

Querist : Anonymous (Querist)

15 March 2016 But in my case, Such Director Invoicing as Consultancy Charges + Service Tax, But you said here It's stand under as Employee- Employer Relation. What your recommendation, Should they stop Invoicing as Consultancy Charges OR They should carry Service Tax invoicing in which we are Deducting TDS under Section 194J ( Professional )

Suresh Ramaswamy

Suresh Ramaswamy (Expert)
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15 March 2016 This problem is now stepping into multiple territory. Under Income Tax Act 1961, TDS is supposed to be deducted on the remuneration paid to directors. In case of whole time directors the payment may be in the form of salary or allowances / commission or share of profit, but their appointment should make it amply clear that they will devote their whole time or substantially their whole in running the day to day affairs of the company under the supervision of the Board of Directors. If the agreement is so drafted, irrespective of whether you deduct TDS u/s 192 or u/s 194J, your compliance with the I.T.Act 1961 is complete.

Under the Companies Act 2013, a director is deemed to be a whole time director if he is closely involved in the day to running of the company and is paid a remuneration for such services. Such Directors do not normally get any Sitting Fees, because attending the meetings of the Board or any Committees thereof is part and parcel of their appointment as full time Director. Please check the terms of appointment and the relevant forms filed with the jurisdictional Registrar of Companies.

The dicey problem arises with the Service Tax Department. Without demeaning the Central Excise Officers, the Service Tax Department is of the opinion, that any person who is not paid a salary is not a whole tie director. And even if salaried directors are paid sitting fees the Department treats that as Directors Service, on which payment the company is liable to pay service tax under RCM.

I am not aware of the terms of appointment of your whole-time director. Secondly is the service rendered personally by the director in his name or in a firm's name (not being proprietorship firm). If it is in a firm's name, the payment is not made to the director but to the consultancy firm. Further if the Director renders consultancy services for which he is registered with Central Excise Authorities and he renders services to other companies / firms too - then in spite of your company terming him a whole time director - he is not one under Companies Act 2013. In such cases, the payment to the director is subject to levy of service tax and payable by the company under RCM.

If the director is rendering consultancy services to only this company, then redo his appointment terms such that the consultancy bills will be part of his total remuneration as a whole time director. Alternatively as you suggested he should stop invoicing the company for consultancy charges.