The big question going around has been that what is the exact nature of services rendered by a director which are covered under Reverse Charge.
That the article restricts itself to the analyze the scope of the term “services supplied by the director” covers in its scope only such services which are related to manual, clerical, technical, supervisory or administrative work or it covers other services like personal guarantee wherein director pledges his credit and does not provide any manual, clerical or technical services..
At the outset, it would be worth to highlight that the provisions should be construed in context of other clauses to make consistent reading of the entire enactment. In this context, Hon’ble Apex Court in the matter of Padmausundara Rao (Dead) &Ors vs State Of T.N. & Ors on 13 March, 2002 emphasised that provision should be construed together and in context of statute and other clauses to make consistent reading of entire enactment. Relevant extract of judgement is as follows:
“for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute.”
The relevant Entry in the Notification is being reproduced hereunder for ready reference as follows-
The relevant entry under Notification No. 13/2017-Central Tax (Rate) Dated 28th June 2017 reads as under:
|Category of Supply of Services
|Supplier of service
|Recipient of Service
|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.
The question is whether the term “services supplied by a director” as provided under Entry No. 6 covers only services provided by virtue of being a director or whether it covers all service provided since he is a director.
The question before Hon’ble Delhi High court in the matter of Suessen Textile Bearings Ltd. And … vs Union Of India And Ors. on 14 November, 1983 Equivalent citations: 1984 55 CompCas 492 Delhi, 1987 (12) DRJ 29, 1984 RLR 262 was
Having examined the nature of the contract of guarantee it requires to be determined whether the guarantee commission payable to a director for his having stood as a surety for the company, the principal debtor, is remuneration for services rendered by him for the Company within the meaning of Section 309 of the Act.
It was held by the Hon’ble Court that
Here the Company is in need of the finances. The financial institutions are not prepared to advance money on the credit of the Company. It agrees to advance the amount on the condition that the director/directors stand surety for the amount. In other words, it is prepared to advance the money and advances the money on the credit of the company plus the credit of the director/ directors. The directors thus assume the liability of the principal debtor which liability, as observed earlier, is co-extensive. He pledges his credit. The payment in consideration of the pledging of the credit or assuming the financial liability would not be remuneration paid for services rendered within the meaning of Section 309. A director by entering into a contract of guarantee does. not do any manual, clerical, technical, supervisory or administrative work. He gets the commission for the pledge of his credit and not for any services’ rendered. The guarantee commission payable to a director, therefore, is not remuneration for the services rendered and, consequently, no approval of the Board was required.
Similar ratio was held in the matter of India Jute Co. Ltd. vs Commissioner Of Income-Tax on 24 February, 1989 Equivalent citations: 1989 178 ITR 6 by Hon’ble Calcutta High Court.
That the difference between service provided as director and service provided for pledge of credit is pretty evident from the above decision. That the amount paid as guarantee commission is not amount paid as remuneration for services provided as director and director by entering into a contract of guarantee does not do any manual, clerical, technical, supervisory or administrative work. He gets the commission for the pledge of his credit and not for any services rendered of manual, clerical, technical, supervisory or administrative work.
Further, that scope of a similar entry pertaining to “Services supplied by a DSA” covers only scope of services provided as “DSA” and payment made as commission to them. If the intention of bring entry of DSA under RCM is limited only to the extent of commission payable to them for services rendered in the capacity of DSA then all similar entries referring to the services provided in a particular capacity should be restricted to services provided as such in that capacity and not to all services provided for which being a director or insurance agent or recovery agent or DSA was not at all necessary.
Thus on a combined reading of the notification and the relevant entry and surrounding similar entries to the entry for services provided by director, it pretty well seems that the intention for other similar entries in the notification is that amount paid for services provided by the person in the specific capacity as DSA, Insurance Agent are covered and not all services provided by such person, then the same principle should also be applied for the entry relating to the services provided by Director.
Therefore, in view of the author, only such amount which is paid for manual, clerical, technical, supervisory or administrative services should be covered under the liability for reverse charge and not amount for any other services which is not related to only manual, clerical, technical, supervisory or administrative services provided by the person as director.
Further similar articles on the applicability of reverse charge on services by director are as follows-
Part-I-Tax under RCM on services of renting of immovable property provided by director to company-Understanding the perspective through Notification and an attempt to gain an understanding on one of the most controversial subjects in GST-https://gst-online.com/tax-under-rcm-on-services-of-renting-of-immovable-property-provided-by-director-to-company-understanding-the-perspective-through-notification-and-an-attempt-to-gain-an-understanding-on-one-of-the-most/
Part-II-Personal Guarantee provided by Directors-Can this be called a Supply when Personal Guarantee is to be given not as a matter of choice but mandatorily as per regulatory requirement laid down as per RBI Guidelines and can there be an open market value or value of like kind and quality when RBI guidelines provide that no remuneration should be charged by Director in such cases-https://gst-online.com/gstcase-238-whether-providing-personal-guarantee-by-the-directors-towards-credit-facility-availed-by-the-company-should-be-liable-to-gst/