GST Update on binding nature of circular on applicant of adverse ruling 62/2020-21

The leviability of GST on the remuneration paid to the directors is the most debatable topic after pronouncement of the advance ruling by Rajasthan AAR in the case of Clay Crafts India Pvt. Ltd. It appears that the dispute would come at rest as the CBIC has issued Circular No. 140/10/2020-GST dated 10.06.2020 clarifying the applicability of tax on Director’s Remuneration under Reverse Charge Mechanism. Let us discuss the key points of the clarification-

Where remuneration is paid to Independent Directors or those Directors who are not employee of the company: Tax under RCM is applicable.

Where remuneration is paid to directors who are employees of the company (depending on the contract of service and where TDS under Income Tax Act is deducted under Section 192): Tax under RCM is not applicable as the transaction is that of employer and employee which is neither supply of goods nor supply of services under Schedule III of the CGST Act, 2017.
This clarification is contradictory to the advance rulings pronounced in the following cases

M/s Craft Clay India Pvt. Ltd. (Rajasthan AAR)

M/s Alcon Consulting Engineers (I) Pvt. Ltd. (Karnataka AAR)
The clarification is no doubt beneficial to all the taxpayers but the moot question is that whether the benefit of this clarification can be availed by the above mentioned assessees who have got adverse ruling pronounced by AAR? Whether the beneficial clarification which is applicable for all assessees would not apply to the above mentioned assessees who sought advance ruling on this issue which is contrary to the clarification issued by CBIC?
In order to find answer to the above questions, reference is to be made to provisions contained in section 103 of the CGST Act, 2017 which states that the advance ruling pronounced by AAR and AAAR are binding on the applicant and on the concerned officer or jurisdictional officer in respect of the applicant. Furthermore, the advance ruling shall be binding unless the law, facts or circumstances supporting the original advance ruling have been changed. After pursuing the provisions, the following questions are raised in the minds of assessee:-

Whether the decision of AAR is binding on jurisdictional officer only with respect to the applicant or for all the assessees of his jurisdiction? Whether jurisdictional officer can raise demand on other assessees on the basis of adverse ruling pronounced with respect to one applicant? If answer to this question is Yes, then if a subsequent clarification is issued in favour of assessee, will the jurisdictional officer follow the clarification for all assessees including the assessee who sought adverse advance ruling?

Whether the clarification issued by CBIC can be considered as change in law so as to nullify the binding nature of the advance ruling on the applicant and jurisdictional officer both? If answer to this question is No, then whether clarification issued can be considered as change in facts or circumstances as when the original advance ruling was pronounced, the said circular was not in force? Whether change in facts or circumstances indicate change in factual case of the applicant and not change in facts on part of government?
The above questions remain unanswered and it is high time for the government to realise this practical anomalies and issue clarification on this aspect in clear terms in the interest of assessees who have sought adverse advance rulings on issues which have subsequently been clarified in favour of the assessees. This is not the first time and in the past, we have witnessed issuance of clarifications post contrary rulings by the AAR, one such example being regarding admissibility of exemption to IIMs. At that time also, we have put forward this issue extensively in series of our update titled as “GST Update on Binding Nature of Advance Rulings-Part 1, 2& 3” which can be accessed on our website www.capradeepjain.com.

Before parting, we submit that clarity is needed as to whether the above mentioned applicant (M/s Clay Craft India Pvt. Ltd.) is required to challenge the adverse ruling before AAAR in order to avail benefit of clarification issued by CBIC or not. Also, what is the remedy available to the applicant if the time period for filing appeal before AAAR has expired? Another issue that may be a huge concern for M/s Clay Craft India Pvt. Ltd. is admissibility of input tax credit on the tax paid on director’s remuneration as it may very well be contended by the department that when there is no liability to pay GST on such transactions, input tax credit is also not admissible. This will lead to “Win Win” situation for department and would adversely impact the applicant.

This is solely for educational purpose.
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GST Update on binding nature of circular on applicant of adverse ruling 62/2020-21

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