AUGUST 24, 2015

By O A Muraleedharan

WHILE verifying the audited balance sheet of a company with the ST-3 returns it is noticed that they have discontinued the practice of paying Service Tax on Directors Fees, under the taxable service category of "Other Taxable Service". On a further examination, it was found that in the previous year they were categorising the remuneration to Directors as 'Sitting Fees' in their books of accounts and the same has been changed to 'Salaries' in the current year. On enquiry it was stated that as the Directors are getting salary, no service tax is payable. This unique situation prompted me to analyse the matter and the finding is as follows:

The Negative List based comprehensive approach to taxation of Service has come into effect from 01.07.2012. The word 'Service' is defined in Sec. 65 (44) of Finance Act, 1994 as -

"Service means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-

(a) An activity which constitutes merely,-

(i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii)  Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or

(iii)  A transaction in money or actionable claim;

(b) A provision of service by an employee to the employer in the course of or in relation to his employment; (emphasis supplied in view of the discussion in para infra).

(c)  Fees taken in any Court or tribunal established under any law for the time being in force.

Consequently, all services other than those enlisted in Sec. 66 D of Finance Act, 1994 (popularly known as the Negative List) and those specifically exempted vide Notification No. 25/2012-ST dated 20.06.2012 (The Mega Exemption Notification), are exigible to Service Tax. It was clarified vide Circular No. 161/12/2012-ST dated 06.07.2012 that the categorization of taxable service has ceased to exist and directions were issued to account all taxable services under the accounting code 00441089. Thus, in fine, the categorization of taxable services has become infructuous. However, the same was restored vide Circular No. 165/12/2012-ST dated 20.11.2012 and a new service category viz. 'Other taxable Services' (Services other than 119 listed) was introduced.

In the meantime, a new sub rule was inserted in Rule 2(1)(d)(EE) of Service Tax Rules, 1994 so as to notify a specific service viz. 'Service provided or agreed to be provided by a Director of a Company to the said Company' which mandated the recipient of Service (i.e., the Company) liable for paying Service Tax, vide Notification No. 46/2012-ST dated 07.08.2012. The percentage of Service Tax payable by the person receiving the service was determined as 100%, by inserting a row as Sl.No. 5 A in the table of Notification No. 45/2012-ST dated 07.08.2012. Rule 2(1)(d)(EE) was further amended w.e.f. 11.07.2014 vide Notification No. 09/2014-ST dt. 11.07.2014 so as to include Directors of body corporates in the tax net. Consequently the provisions of Section 68(2) of the Finance Act 1994 are attracted in this case and all the obligations of Service Tax statute follows. After the amendment, the extant statute is as under:

Rule 2 (1)(d)(EE) - 'in relation to service provided or agreed to be provided by a Director of a Company or body corporate to the said Company or body corporate, the recipient of such service'

This being the statutory position, the scope and ambit of the service is to be examined. What is taxable under this category of service is the 'Service by a DIRECTOR of a Company or body corporate provided to the said Company.'

Sec. 2 (34) of Companies Act, 2013 defines a DIRECTOR as a Director appointed to the Board of a Company. Again as per Sec. 2 (10) of Companies Act, 2013, 'Board of Directors or a Board' in relation to a Company, means the collective body of the Directors of the Company. Thus it may be seen that 'All those who are part of the Director Board' is/are a DIRECTOR(s).

In these circumstances, the definition of 'Managing Director' and 'Whole time Director" (Executive Director) also may be noted. Sec. 2 (54) ibid reads "Managing Director means a Director who by virtue of the article of a Company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the Company and includes a director occupying the position of Managing Director by whatever name called. Similarly, Sec. 2 (94) ibid reads 'a whole time Director includes, a Director in the whole time employment of the Company'. It, therefore, appears that every person occupying a position in the Director Board, including the Managing Director and whole time Director is essentially a DIRECTOR, and the service provided by them to the Company or body corporate is exigible to Service Tax.

Having identified the taxable service, the valuation of the same has to be arrived at. However, before embarking on the valuation, it appears that, it is only proper to call for an examination of a particular area in the definition of 'service' viz. "a provision of service by an employee to the employer in the course of or in relation to his employment". This activity is excluded from the ambit of Service as defined in Sec. 65 (44) of Finance Act, 1994, w.e.f. 01.07.2012. As employee - employer relationship is excluded from the definition of service and as it is not a service,the same is placed in pari passu with 'Goods, Immovable Property, Money, actionable claim' etc. The employee - employer relationship is normally referred and converted to as 'salary'. In view of the above explicit provision in the definition, salary, ipso fact o, is not taxable, which is just like a Goods, Immovable property, money or actionable claim. A  salary  is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece meal wages, where each job, hour or other unit is paid separately, rather than on a periodic basis. That is why Service Tax is not demanded from a Manager of a Company as it is not a service. Whereas, the remuneration/consideration received by any Director from the company, by whatever name it is called, shall form part of a taxable value of the service viz."Directors service".

As per Sec. 67 of Finance Act, 1994, the value of a taxable service, in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider of such service provided or to be provided by him, and in a case where the provision of service is for a consideration not wholly or partially consisting of money, be such amount in money as with the addition of Service Tax charged, is equivalent to the consideration. In other words, the money charged and the money equivalent of the non-monetary consideration received by the director - let it be any goods, immovable property or 'SALARY' together forms the gross value of the service by a Director to the Company.The reimbursable expenditures also should invariably form part of the consideration. It is an admitted fact that the consideration is any money or its equivalent given or passed to any person for services rendered by him and includes perquisites.

Thus, it can be judiciously concluded that, in the case of a service provided by a Director to the Company, the gross amount of the taxable service shall be the consideration received in terms of money, which is normally referred to as 'sitting fees' in addition to the money equivalent of the non-monetary consideration including the 'salary' and the perquisites (travelling/food/accommodation charges etc.), if any, and Service Tax is leviable at the appropriate rate.

But, why is there so much fuss on the non-payment of Service Tax on the Directors Service by adopting such 'salaried' tactics when the fact of the matter is that the 'services' can be considered as an eligible input service.

(The author is Assistant Commissioner, Central Excise (Audit), Cochin and the views expressed are strictly personal.)