Case – Alcon Consulting Engineers (India) (P.) Ltd. (AAR Karnataka)

• While providing consultancy services for construction projects, employees of the applicant incurred some expenses on behalf of the applicant, the advance ruling is sought whether the periodic reimbursement of expenses incurred by staff on applicant’s behalf liable to GST.
• The Applicant is a Private Limited Company and is registered under the Goods and Services Act, 2017. The applicant has sought an advance ruling in respect of the following question:

1. a) Whether the expenses incurred by the Staff members on behalf of the Company exceeding Rs.5000-00 a day and then reimbursed periodically are liable to tax
2. b) Whether RCM is applicable to remuneration paid to the Directors.

• Sometimes expenses were incurred by the employees on behalf of the firm is exceeding Rs.5,000-00 in a day and it is very difficult to monitor the same at regular intervals because their staff members are working at remote areas and there is no connectivity to reach or contact the office on a day to day basis or vice versa.
• Services by an employee to the employer in the course of or in relation to his employment are covered under Clause 1 of the Schedule III which relates to the activities or transactions which shall be treated neither as a Supply of Goods nor as a Supply of Services. Hence the services provided by the employees of the applicant to the applicant are not a supply. Further, the expenses incurred by the employees are expenses of the applicant and the consideration is payable by the applicant himself and later on reimbursed by the applicant.
• The term “consideration” in relation to the supply of goods or services or both is defined in clause (31) of Section 2 of the Central Goods and Services Tax Act, 2017 as under:

(a) Any payment made or to be made, whether in. money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) The monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.”

• The amount paid by the employee to the supplier of service is covered under the term “consideration” as if it is paid by the applicant himself for the services received by them on behalf of the company. This amount reimbursed by the applicant to the employee, later on, would not amount to consideration for the supplies received as the services of the employee to his employer in the course of his employment is not a supply of goods or supply of services and hence the same is not liable to tax. However, if any tax is applicable, it is on the services received by the employee on behalf of the applicant in the course of his employment, irrespective of the fact that it is paid by the applicant or the employee and later reimbursed by the applicant.
• Regarding the remuneration to the Directors paid by the applicant, the services provided by the Directors to the Company are not covered under clause (1) of the Schedule III to the Central Goods and Services Tax Act, 2017 as the Director is not the employee of the Company. The consideration paid to the Director is in relation to the services provided by the Director to the Company and the recipient of such service is the Company as per clause (93) of section 2 of the CGST Act and the supplier of such service is the Director.
• Entry 6 of section 9(3) of CGST Act,2017 is as under:

Services supplied by a Director of a company or a body corporate to the said company or the body corporate located in a taxable territory will be taxable and tax should be paid under RCM

• In the present case, the applicant is the company and is located in the taxable territory and the Directors’ remuneration is paid for the services supplied by the Director to the applicant company and hence the same is liable to tax under reverse charge basis under section 9(3) of the Central Goods and Services Tax Act, 2017.

CONCLUSION

1) The amounts paid to the employees of the applicant company as reimbursement of expenses incurred by them in the course of employment of the applicant company are not liable to tax under the provisions of the Goods and Services Tax Act, 2017 as the transaction of the services supplied by a supplier to the employee and paid by the employee is liable to tax after 30.09.2019.

2) The remuneration paid to the Director of the applicant company is liable to tax under the reverse charge mechanism under sec 9(3) in the hands of the applicant company.

Recent ruling

Lately, an application filed before the Rajasthan bench of the AAR, Clay Craft India Pvt. Ltd. had sought clarification on whether salaries paid to directors would attract Goods and Services Tax.

In the application made by the applicant, the following details were mentioned:

• All of the directors are performing all the duties and responsibilities as required under the laws. However along with that, all directors are also working in the company at a different level of management and each one of them is holding charge of procurement of raw material, production, quality checks, dispatch, accounting, etc. In other words, they are also working as an employee of the company for which they are being compensated by the company by way of a regular salary and other allowances as per the company policy and as per their employment, contract. These Directors are treated at par with any other employee of the company as far as their employment is concerned. The company is deducting TDS on their salary and PF laws are also applicable to their service. Therefore, in all practical purposes, these directors are the employees of the company and are working as such besides being Director of the company
• Notification No. 13/2017 – Central Tax (Rate) dated 28.06.2017 states that “on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of central tax leviable under section 9 of the said Central Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of such services”. The notification is issued under Section 9(3) of the CGST Act, 2017. Entry 6 of the said Notification reads as under-

Sr.No.	Category of Supply of Services	Supplier of Services	Recipient of Services
1	2	3	4
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

• In the present case, the applicant is the company and is located in the taxable territory and the Directors’ remuneration is paid for the services supplied by the Director to the applicant company and hence the same is liable to tax under reverse charge basis under section 9(3) of the Central Goods and Services Tax Act, 2017;
• Therefore, going by the above decision one interpretation emerges that the work done by directors as an employee would also be covered and their services would be leviable to GST under clause (93) of section 2 of the CGST Act 2017. However, the Hon Authority of Advance Ruling has not differentiated nor it has dealt with the possibility of a person being the director of the company and simultaneously working as a director/employee also;
•  M/s Clay craft (P) Ltd., are a paying GST under reverse charge mechanism on the on any commission paid to our Director as such amount pertaining to the service provided by them in the capacity of a Director;
• Salary is paid to our Directors is being booked under “Income from Salary” by the Directors in their personal Income Tax returns;
• In such circumstances a doubt has arisen about the applicability of Reverse Charge Mechanism on the salary paid to the Directors of our company who are also working as Directors as an employee and having been treated as an employee at par with other employees;
• Services provided by an employee to his employer are under clause 1 of the Schedule III which relates to the activities which are not treated either as supply of Services or Goods.
• Directors along with being director of the Board of Director of the company are also working as whole time Director in the company as an employee and are being treated at par with any other employee of the company
• In the light of the treatment of Directors the applicant is of the view that the Directors who are working as whole time directors are de-facto employees of the company and thus the payments made to them as salary benefits are not liable to GST and consequently the company is not liable to pay any GST on such payments by way of Reverse Charged Mechanism.
• From the legal provisions and the article of association and Memorandum of Association of the applicant it is clear that the Board of Director appoints the Director and other whole time director and once it is admitted that there is an appointment then it is obvious that there exist a relationship of employer and employee between the Board of Director and Managing Director/ Whole time Director.

Rulings of the AAR
In spite of the various representations made by the assess the AAR ruled that:
The consideration paid to the Directors by the applicant company will attract GST under reverse charge mechanism as it is covered under entry No. 6 of Notification No. 13/2017 Central Tax (Rate) dated 28.06.2017 issued under Section 9(3) of the CGST Act, 2017.

Conclusion:-
Therefore it can be concluded that even if a director is appointed as the whole time or the managing director of the company the remuneration paid to them will attract GST under the reverse charge mechanism.

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