Finance minister in budget 2012 deepened the worry lines of the directors of innumerable companies who were enjoying the remuneration from company without deduction of tax at source by inserting a new clause 1(ba) in Section 194J which expand TDS net to on any remuneration paid to Directors of a company. This clause will be effective from 1st July, 2012.
In accordance with newly inserted clause 1(ba) in Section 194J, TDS @ 10% is to be deducted from any remuneration paid to Directors of accompany with effect from 1st July, 2012. This clause reads as follows
“Any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company shall liable to be deducted @10%.”
This decision of finance ministry was the result of bundle of uncertainties hovering over the deduction of tax at source on sitting fees, commission and remuneration paid to the directors. Sitting fees is the fees which are given to the directors for attending the meeting of board or any committee as the case may be. But now with the introduction of the above new clause (1)(ba) in section 194J, it is clear that TDS on any remuneration other than covered under salary or fees paid to directors or sitting fees or any payment of same nature by other name shall be covered under the ambit of sec. 194J and will be subjected to TDS @10%.
For the sake of easy understanding of our readers the whole issue may be bifurcated into two parts where the payments are made to directors in two ways:
a. By way of salary.
b. By way of fees paid for the professional services.
a) By way salary: The readers may notice that when payments are made in nature of salary, then provisions of sec.192 are attracted. It clearly means that under such situations directors are considered as employee of the company. Generally the executive directors are paid salary and they are not entitled to sitting fees or for other services.
b) By way of fees paid for the professional services: It may be noticed that directors’ remuneration includes payments made to Directors for services rendered in any other capacity as per the Companies Act, 1956. To further clarify this type of payments to directors the relevant sections of companies Act, 1956 i.e. sec. 198 and 309 can be relied upon. The collective interpretation of this section reveals that remuneration paid to whole time director/ managing director include payments made on account of
· sitting fees
· any other fees paid for rendering professional services.
From above analysis and careful reading of newly inserted clause in sec.194J it is very clear that before amendment sec.194J use to apply only on amount paid for professional and technical services but with above said insertion, the sitting fees and commission paid and any payment by whatever name are dragged into realm of Sec.194J.
On above scrutiny some confusion which may arise
1. Whether the service tax is payable when directors are paid on account of rendering services?
The board vide Circular No. 115/09/2009- ST, dated 31-7-2009 clarified that
If Companies make payments to Managing Director/Directors whether Whole-time or Independent, referring those payments as ‘Commissions’, then such payment remitted by companies to their Managing directors or directors even though termed as commission, is not the ‘commission’ that is within the ambit of business auxiliary service. Therefore there is no question of chargeability of service tax on such amount.
The board further clarified that Managing Director or Directors being perform managerial functions and they do not any perform consultancy or advisory function. The definition of management consultant service makes it clear that what is envisaged from a consultant and where the expertise of consultant is asked for is termed as advisory service and not the actual performance of the management function. The payments made by Companies, to Directors cannot be termed as payments for providing management consultancy service.
Therefore, it is reiterated that service-tax is not chargeable under the category ‘Management Consultancy service’ on the amount paid to Directors whether Whole-time or Independent is not chargeable to service tax under. However, service –tax is chargeable if such directors provide any advice or consultancy to the company and they separately paid for such services.
2. Whether the commission payable to director will be covered under section 194J OR 194H?
With insertion of new clause in Finance bill 2012 in sec.194J namely clause (1)(ba), it is very clear that commission or any other sum paid by any name to the director which is not covered under section 192 will fall within the ambit of sec. 194J.
3. Whether sec.194J will attract on payment to the foreign director also?
Foreign director will be on equal footing with the Indian directors for the sake of application of TDS provisions. Hence if foreign director is full time director in any company then he will get remuneration or salary as the case maybe after deducting tax at source under section 192. On other hand if company gets professional or other management services from its foreign director then he will be called non-executive director and any payment remitted to him will attract section 194J and TDS will be deducted thereof.