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Clay Craft India Pvt Ltd Advance Ruling
(Facts and Flaws)

Facts of Case

1. The applicant is a private limited company named “Clay Craft India Pvt. Ltd.”

2. There are total six directors in the board of company.

3. Along with discharging their duty as directors required under the law, all of them are working in the company at different level of management and each one of them is holding charge of procurement of raw material, production, quality checks, dispatch, accounting etc. Directors along with being director of board of the company are also working as whole time director of the company as an employee and are being treated at par with any other employee of the company.

4. Director’s Remuneration - Directors are being paid in two capacity.

a) First, in the form of “commission” in the capacity of directors for rendering their services to the company.

b) Second, in the form of “salary” in the capacity of employee for working in the company and discharging their regular duty such as   procurement of raw material, production, quality checks, dispatch, accounting etc.

5. On commission paid to directors, company is duly paying GST under reverse charge mechanism. However salary payment to directors are being treated at par with any other employee and the same was being booked under salary expenditure and no GST is being paid under RCM on salary expenditure.

6. Salary paid to directors are being taxed and assessed as “Income under the head Salary” in the director’s personal income tax return.

7. Company is properly deducting PF & TDS u/s 192 on director’s salary like any other employee of company.

Main question on which the advance ruling was sought by the applicant.

Whether GST is payable under Reverse Charge Mechanism (RCM) on the salary paid to directors in the capacity of employee.

Author’s Note

The whole issue revolves around two legal provisions:-

First, is the entry no. 6 of Notification No. 13/2017 - Central Tax (Rate) dated 28.06.2017, which clearly states that director’s services is specifically covered under RCM and company (being receiver of service) is liable to pay GST under RCM on the services provided by director (being supplier of service). The relevant text of notification is being reproduce below.

Sl. No.	Category of Supply of Services	Supplier of Services	Recipient of Services
6	Services supplied by a Director of a company or a body corporate to the said company or the body corporate	A director of a company or a body corporate	The company or a body corporate located in the taxable territory

Vs.

Second, is the schedule III of CGST Act, 2017 titled as “ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES”. Clause (1) of the above schedule read as under:

“Services by an employee to the employer in the course of or in relation to his employment.”

This means, services by employee to his employer shall not to be treated as supply of service and no GST is applicable on it.

Arguments by company

1. Company relied on the schedule III of CGST Act, 2017 and argued that salary is being paid to directors in the capacity of employee, in accordance with their contact terms and at par with other employees.

2. Company is also deducting PF and TDS u/s 192 on the salary paid to directors.

3. Company is separately paying commission to directors for their services being rendered in the capacity of director and company is duly paying GST under RCM on the same.

4. Hence, company argued that GST is not payable under RCM on the salary paid to directors in the capacity of employee.

Decision by AAR

Authority rejected the contention of the applicant and held that benefit of clause (1) of schedule III of CGST Act, 2017 cannot be given to the applicant on the ground that directors are not the employees of company. Authority held that director is the supplier of service and company is the receiver of service and therefore according to entry no.6 of Notification No. 13/2017 - Central Tax (Rate) dated 28.06.2017, GST is duly payable under RCM on salary paid to directors also.

Author’s Note

However, there is no litigation over the issue that director’s service is classified under RCM vide Notification No. 13/2017 - Central Tax (Rate) dated 28.06.2017. But the main issue of litigation was that whether salary paid to directors in the capacity of employee is exempted by clause (1) of schedule III of CGST Act, 2017 or not? There seems to be several flaws in this order as below.

1. First, Authority held that directors cannot be employees of company under GST law and therefore benefit of clause (1) of schedule III of CGST Act, 2017 cannot be given to the company. Whereas in all other laws, directors are treated as employee of company. E.g. PF Act also recognise director as employee, Income Tax Act also recognise director as employee, Companies Act also recognise director as employee. Then how GST law draws a different view from all of the above central laws. No clarification was given by the authority in this regard as to how it reached at the above conclusion.

2. Authority also ignored the fact that director’s salary was being taxed, assessed and accepted by Income Tax Department in their personal income tax return under the head “Income from Salary” only.

3. Authority also misinterpreted the fact that directors were being separately paid in the form of commission for their services rendered in the capacity of director and company was duly paying GST under RCM on the same.

4. Authority also ignored the basic rule that company and directors are two distinct person in the eyes of law and directors can also be the employee of company.

Therefore, I believe this order needs to be re-examined by higher authorities by keeping the same in sync with other central laws as well.

Legal validity of the ruling:

We know that, an advance ruling is binding on the applicant only (subject to his rights to appeal). However we must not forget that, any advance ruling has a persuasive impact on other paxpayers as well.
 

Thank you!

Author - Mohit Jain

The Author is FCA with 10+ years experience and founder of TaxReply. The Author has experience of handling GST compliances of multiple countries including India.

 

Click here for full text of order

This judgement has also not clarified about a person being director in two or more companies. Every company is deducting tds under section 192 and all other compliances are done.
What would be the position in that case wether gst need to pe paid on rcm basis or not.

If the director is working in the capacity of INDEPENDENT DIRECTOR OR PART TIME DIRECTOR, as the both are not treated as employees of the company(Non-government Co.), in that case the company is liable to pay GST under RCM on salary given to them.

This is an order by AAR, Rajasthan and which is being subject to challenge before AAAR, Rajasthan and then before higher fourm i.e. HC and SC and only then it will become final. At present this is operative in case of Clay Craft only and no planning based on this AAR should be made.
In my personal view there is no service by any director to company may be Independent Director or regular director, all director are employee and which is outside preview of GST.

Recently AAR, Rajasthan has passed a ruling that company is liable to pay GST under RCM on director's salary
https://taxreply.com/gst/Clay_Craft_India_Pvt_Ltd_Advance_Ruling_-_Facts_and_Flaws-521.html

Order seems to be incorrect as salary is regular, periodic, same & equal payment irrespective of the fact that there may or may not be:
(i) equal assignments
(ii) any assignment at all, i.e. no assignment at all,

whereas commission is
(i) not on "works not performed"
(ii) work-wise
(iii) never periodic & regular.

How can two be equal and given equal treatment even if directors taking salary are not employees of company?

https://twitter.com/indi_0z/status/1253668295313518593

https://gab.com/indi_0z/posts/104053625295927340

Salary to director working like employee not as nominateed director appointed by other authorities is out side the preview of GST as per definition of supply therefore No RCM

However any other payment to director including nominated director is under RCM

Advance rulling is applicable on the applicant only

It is observed that AAR in these rulings have not considered or examined Schedule III nor did examine the facts that if such director was appointed as employee or otherwise. So in our opinion these rulings cannot have a locus standi.

Highly erroneous ruling. All should wait for AAAR, Hc n SC on the matter.

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