Page 29 - GSTL_6th August 2020_Vol 39_Part 1

2020 ] DIRECTOR’S REMUNERATION UNDER REVERSE CHARGE J11
application with reference to fact whether the relationship of company and direc-
tor is of employer-employee or it is on principal to principal basis. Without dis-
cussing these two important aspects, one cannot arrive at conclusion. Therefore,
this ruling was based upon incomplete analysis of legal provisions.
Similarly in the case of Clay Craft India Pvt. Ltd., while ruling the issue,
the advance ruling authority took the simplistic approach and held straight for-
ward that the directors cannot be treated as employee of the company. The Ad-
vance ruling authority failed to appreciate the facts and evidences put forth by
the company regarding the terms and conditions mentioned in contract, TDS, PF
deduction, treatment of income by directors in their income tax returns, etc. In
view of silence of authority on these vital issues, the conclusion derived by it
cannot be construed as valid and well-reasoned.
Due to above referred facts, there was unrest in trade on the issue and
representations were being made to Board to clarify the issue. In response of this,
Board has issued Circular No. 140/10/2020-GST, dated 10th June, 2020 [2020 (37)
G.S.T.L. C10].
Circular No. 140/10/2020-GST, dated 10-6-2020
This is the most awaited clarification on the issue. It clarifies various sit-
uations clearly depicting when reverse charge will apply on director’s remunera-
tion and when the same will be covered in Schedule-III. The key takeaways from
this circulars are discussed as follows :-
 Remuneration paid to independent directors :-
Board clarified that remuneration paid to independent directors is
not covered in Schedule-III to CGST Act, 2017. It further clarified
that as per Section 149(6) of Companies Act, 2013 read with Rule 2
of Companies (Share Capital and Debentures) Rules, 2014, an inde-
pendent director is the director who is not the employee of the
company. Therefore, any remuneration paid to such independent
director is not covered in Schedule-III and accordingly, it is taxable
in the hands of company on reverse charge basis.
 Remuneration paid to directors who are employees of the
company :-
(1) Board clarified that to determine whether a director is em-
ployee of the company or not, the nomenclature or designa-
tion is not important. For this purpose, terms and conditions
of contract are relevant. Thus, -
- If the contract depicts employer-employee relation-
ship, then Schedule-III will apply in respect of activi-
ties undertaken in accordance with the service-
contract and accordingly, reverse charge shall not
apply.
- If the contract states that relationship between direc-
tor and company is on principal to principal basis,
then Schedule-III will not apply and remuneration
will be chargeable to tax on reverse charge basis.
[Continued on page J18]
GST LAW TIMES  6th August 2020  29