Whether RCM is applicable on the services provided by the director in his individual capacity to the company?

PJ/Case Study/2020-21/162

21 August 2020

M/s Paras Mool Chand Chattar Hospital Private Limited (OIA No. 586(CRM)ST/JDR/2019 dated 19.06.2019

Issue involved: Whether RCM is applicable on the services provided by the director in his individual capacity to the company?
Brief Facts: The appellant is engaged in providing services namely renting of immovable property service, Security / Detective agency service as defined under section 65 (8) And 65 of the Finance Act, 1994 and holding service tax registration number AABCP2822PAD001. It was found that the appellant has taken immovable property on rent from the director of the company under ‘Renting of immovable property service’ and a paying rent to the director. The adjudicating authority vide impugned Order has confirmed the demand of Rs.189300/– along with interest and also imposed penalty of Rs.1 89300/– under section 78 of the finance act, 1994 under the provisions of reverse charge mechanism introduced vide notification number 30/2012-ST and 45/2012-ST dated 07.08.2012.

Applicant’s Contention:The assesse has contended in the following manner

That the demand in impugned SCN Is for the period from 2011-12 to 2016–17. The vacant land is given by Mr. Mool Chand Chatter To the appellant and it was contended by appellant that as per clause b of section 65(105) (zzz), immovable property does not include vacant up to 30.06.2012.
That impugned OIO clearly mentioned that the notification number 45/2012 dated 07.08.2012 has brought the reverse charge on director. Hence the demand for the period from 2011–12 as well as for the period from 01.04.2012 207.08.2012 under reverse charge cannot be issued to the appellant.
That all the services provided by director to the company are covered under reverse charge mechanism in his capacity of the director in his professional capacity whereby there is no such services provided in the capacity of director but in the capacity of the land owner. That the entry in the notification simply mention services provided by a director of a company and does not specify services provided by a director of company in his individual capacity too. Consequently, the services provided by director of company to the company in his professional capacity are only covered under reverse charge mechanism.

Appellant relied on the case of British Airways PLC v/s UIO [2002(139) ELT6(SC) (ii) CCE, Mumbai-V v/s M/s GTC Industries Ltd. [ 2008-TIOL-1634-CESTAT-MUM-LB].

That the complete demand is barred by time of limitation. The demand for the period from 2011–12 to 2015–16 is issued on 02.08.2017. The extended period can be invoked for maximum five years. Hence, the demand for the period 2011–12 is clearly time-barred.
That extended period of limitation is not invocable in the present case because the dispute pertains to interpretation of law. In this regard, the appellant submitted that the allegation that the issue does not pertain to interpretation of law is totally erroneous.
That no penalty in a case in a case of interpretation in nature. Appellant relied on the case of M/s ITEL Industries Ltd. vs CCE, Calicut [2010-TIOL-236- CESTAT-BANG] = [2010(251) ELT 429 ( TRI-BANG )]. In the case of M/s Hindustan Lever Ltd. v/s CCE, Lucknow [ 2009-TIOL-1795-CESTAT-DEL].

Reasoning of judgement: The Commissioner(Appeals) concluded that services provided by the director to the company have been brought under the reverse charge vide notification number 45/2012 dated 07.08.2012, hence the demand on the rent of immovable property for the period from 2011–12 as well as for the period from 01.04.2012 207.08.2012 under reverse charge is not maintainable.
Moreover, all the services provided by directed to the company are covered under reverse charge mechanism in his capacity of the director in his professional capacity whereby there is no such services provided in the capacity of director but in the capacity of the land owner. Entry 5A of Notification number 30/2012 – ST dated 20.06.2012 as amended by notification number 45/2012 – ST dated 07.08.2012 which is as under:-

S.No.	Description of Service	%age of service tax payable by the person providing service	%age of service tax payable by the person liable for paying service tax other than the service provider
5A	In respect of service provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate.	NIL	100%

Consequently, the services provided by director of a company to the company in his professional capacity are only covered under reverse charge mechanism.
The appellant contended that the appellant has taken immovable property on lease from its directors against which rent is paid. The amount of rent is not a part of remuneration as a director. Moreover, it was fixed in advance. This rental income has nothing to do with consideration against services as director of company. The law, as it stands, is very clear that service tax has to be paid by the person liable to pay in terms of section 68(1) and 68(2) and there cannot be any deviation from the statutory provisions.
The words used in the rules are by a director of a company to the said company and not by a person who is director of a company. Therefore, services provided in the capacity of a director alone would be subject to service tax. In other cases, it would not fall under the category of reverse charge in terms of notification number 30/2012 – ST dated 20.06.2012.
Moreover, the rent agreement entered into by both the parties that it doesn’t speak about renting of the property by the director of the company in any sense and therefore, the service tax has to be paid by the person who has given the property on rent and the company is not liable to pay the service tax. Therefore, notification number 30/2012 –ST dated 20.06.2012 is not applicable in the present case. The agreement did not mention the appellant as director of the company.
Decision: The appeal has been passed in favour of the appellant and the order of the adjudicating authority has been set aside.
Conclusion: Payment under RCM on the directors renumeration and other ancillary activities has been a matter of dispute in GST also. After contradictory advance rulings in GST regime on this matter, Government issued Circular No. 140/10/2020 – GST dated 10th June, 2020 specifying that payment booked as “Salary” in books of accounts of the company and on which TDS is deducted u/s 192 of Income Tax Act, then, such payment is covered under schedule III of CGST Act, 2017 and no GST is applicable on such payment.
Payment made other than “Salary” and TDS on which is deducted under section 194J of Income Tax Act, 1961, then, company is liable to pay GST on such payment under RCM. In the current regime also, the words used in the notification 13/2017-Central Tax(Rate) are by a director of a company to the said company and not by a person who is director of a company. Therefore, services provided in the capacity of a director alone should be subjected to GST.

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PJ/Case Study/2020-21/162
21 August 2020

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