Service by a Director or Body Corporate
Since 1.7.2012, any service provided by a director who is non executive, nominee and independent directors to the company, thus on such activity carried service tax is payable. Under are the justifications for clarity.
Section 65B(44) of the Finance Act, 1994 as introduced w.e.f 01.07.2012 is produced as follows:
“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include –
(b) a provision of services provided by employee to employer in the course of or in relation to his employment;
From the above explanation, services provided by employee to employer have been excluded from the definition of ‘service’.
With reference to case of Gautam Sarabhai(1984)(Guj HC) it was held that a director can be employee of the company.
According to rule 2(1)(d)EE of Service Tax Rules inserted w.e.f 07.08.2012 use the words in relation to service provided or agreed to be provided by a director of a company to the said company, the recipient of such service shall be person liable for paying service tax.
Reverse charge mechanism can be applied only if a service is otherwise taxable. With reference to Notification No. 30/2012 which indicates payment of service tax by the service receiver under complete reverse charge @ 100% of the service tax liability. Hence, if there is employee-employer relation in the course of employment, then there will not be any service tax triggered and question reverse charge does not arise.
In the recent budget of 2014-15, there are amendments made in respect to service by a director to company which will accompanied by service by director to body corporate w.e.f 11.07.2014. Therefore this will affect some Corporations like Life Insurance Corporation, Reserve Bank of India, etc which are ‘body corporate’ and not companies. For more clarification, the recent amendment will not affect societies or cooperative societies.
The relationship between employer and employee is distinct from relation between service receiver and service provider. As long as activities performed are duties within the boundaries of employment, amount so paid by employee, even if termed as commission, it would be leviable to Service Tax. For further clarity refer CBE and C circular No. 115/09/2009-ST dated 31.07.2009.
A person is acts in more than one companies as managing director, and takes remuneration not treated as ‘Management Consultancy Service’ and would not be subject to Service Tax – Bosch Chassis Systems India Ltd. v.CCE (2014 (1) TMI 1198 – CESTAT MUMBAI)
For valuation of service tax, it will be payable on sitting fees paid to directors for attending Board Meetings, travelling expenses and incidental expenses, commission or other remuneration paid, if any.
‘Consideration’ for service can be in any form and need not be in monetary manner. If in case, stock options are offered to Non executive and Non whole time director, on basis of value of such benefits Service tax would be chargeable. For valuing stock option, provisions of Income Tax Act has to be taken care of.
In order to ascertain the liability of Service Tax, the rate to be charged @ 12.36% on the gross value of services so rendered by the director, the reason is that the service receiver is basically discharging the liability of service provider.
According to Rule 2(1)(d)EE of Service Tax Rules,1994 inserted w.e.f. 07.08.2012 and Notification. 30/2012-ST dated 20.06.2012 amended w.e.f. 07.08.2012, company receiving the services of directors is liable to pay Service Tax under reverse charge mechanism.
With reference to Proviso (ii) to Para 1 of the Notification No. 33/2012 dated 20.06.2012 which provides for exemption to Small Scale providers having value of taxable service less than specified limit states that nothing in this notification shall apply to such value of taxable services in respect of which Service tax shall be paid by such person an DIN such manner as specified under sub-section (2) of Section 68 of the Finance Act, 1994 read with Service Tax Rules,1994.
Moreover threshold exemption of ₹ 10 lacs is not applicable in cases where the service receiver is liable to pay Service Tax under reverse charge mechanism, as per the provisions of Section 68(2) read with Rule 2(d) of Service Tax Rules.
In general practice, the Non executive directors provides other service like ‘Management Consultancy Service’ to the company for which he raises separate invoice, whether the company is liable to pay Service Tax under reverse charge mechanism ? the answer to this is of fair interpretation of law. The words used in the rule are ‘by a director of a company to the said company’ and not ‘by a person who is director of a company’. Services provided in the capacity of a director would be subject to Service Tax or otherwise would not fall under the category of complete reverse charge.
CENVAT Credit cannot be utilized for payment of Service Tax in respect of services where the person is supposed to discharge the liability under reverse charge. With accordance to Rule 3(4) of CENVAT Credit Rules, 2004 inserted w.e.f. 01.07.2012, Explanation to such rule is CENVAT Credit cannot be used for payment of service tax in respect of services where the person liable to pay tax is the service recipient.
As per Rule 2(l) of CENVAT Credit Rules, 2004 contains the definition of ‘Input Service’ which includes the services in relation to office related work. Therefore, services provided by the director are certainly related to administration of a company. Hence, it would be eligible to avail CENVAT Credit of service tax paid. Thus, the company paying service tax under reverse charge method can avail the benefit of CENVAT Credit.