Authority for Advance Ruling (Karnataka): In an application sought for advance ruling on whether reimbursement of expenses at actual cost which are incurred by the employee staff on behalf of the company is liable to tax, and whether Reverse Charge Mechanism (‘RCM’) is applicable on reimbursement of expenses paid on behalf of the company at actuals which are incurred by the employee staff who is also a whole-time director company, the two-member bench of M.P Ravi Prasad and Kiran Reddy held that reimbursement of expenses at actual cost which are incurred by the employee staffs on behalf of company is not liable to tax, since it is under Clause 1 of the Schedule III of CGST Act, 2017. Further, RCM is not applicable on reimbursement of expenses paid on behalf of the company at actuals incurred by the employee who is also a whole-time director.
The applicant is an integrated Custom Research and Manufacturing Services provider offering access to discovery services drug production. The applicant states that employees take all the invoices in the name of the company for domestic transaction invoices and the company takes unput tax credit in respect eligible transactions.
The Authority said that the services by an employer during or in relation to his employment are covered under clause 1 of the Schedule III which relates to the activities or transactions which shall be treated neither as a supply of goods nor as a supply of services. Hence, the services provided by the employees of the applicant to him are not a supply. Further, the expenses incurred by the employees are the expenses of the applicant and the consideration is payable by the applicant himself and later reimbursed by the applicant.
The Authority referred to the term “consideration” in relation to the supply of goods or services as defined in clause (31) of Section 2 of the Central Goods and Services Act, 2017, and said that, the amount paid ‘by any other person’ and is therefore covered under term “consideration” paid by the applicant to the service provider for the services received by the employees on behalf of the company. This amount reimbursed by the applicant to the employee later would not amount to consideration for the supplies received as the services.
The Authority took note of Circular No. 140/10/2020 dated 10-06-2020 and said that the leviability of GST on renumeration paid by companies to directors, who are also an employee of the company can be clarified by the said circular.
The Authority said that a director who has taken employment in the company may be functioning in dual capacities, namely, one as a director of the company and the other based on the contractual relationship of master and servant with the company. As per the Circular only part of employee director’s renumeration which is declared separately other than “salaries” in the company’s accounts and subjected to tax deducted at source under Section 194 J of the Income Tax Act shall be treated as consideration for providing services which are outside the scope of Schedule III of the CGST Act, and hence taxable under reverse charge basis. Hence, it is held that RCM is not applicable on reimbursement of expenses on actuals to a whole-time director of the company who is also an employee of the company.
[Yaadvi Scientific Solutions, In re, 2022 SCC OnLine Kar AAR-GST 29, decided on 02-12-2022]
Advocate who appeared in this case :
Represented by: Chartered Accountant Parveena Shastri;
*Apoorva Goel, Editorial Assistant has reported this brief.