RCM Not Applicable On Reimbursement Of Expenses Paid On Behalf Of Company At Actuals Incurred By The Employee Staff Who Is Also A Whole-Time Director: AAR

The Karnataka Authority for Advance Ruling (AAR) has held that the reverse charge mechanism (RCM) is not applicable to reimbursement of expenses paid on behalf of the company at actuals that are incurred by the employee staff, who is also a whole-time director of the company.

The two-member bench of M.P. Ravi Prasad and Kiran Reddy T. has observed that reimbursement of expenses at an actual cost that is incurred by the employee staff on behalf of the company is not subject to tax.

The applicant is an integrated Custom Research and Manufacturing Services (CRAMS) provider offering single-point access to discovery services, CPRD (Chemical Process Research and Development), drug product development and regulatory support services, and pharmaceutical technologies to global pharma and biotech companies.

The applicant has sought an advance ruling on the issue of whether reimbursement of expenses at actual cost, which is incurred by the employee staff on behalf of the company, is subject to tax.

Yet another issue raised was whether the reverse charge mechanism is applicable to reimbursement of expenses paid on behalf of the company at actuals that are incurred by the employee staff, who is also a full-time director of the company.

The AAR stated that only a portion of an employee director's remuneration that is declared separately from "salaries" in the company's accounts and subject to TDS under Section 194J of the IT Act shall be treated as consideration for providing services that are not covered by Schedule III of the CGST Act and thus taxable on a reverse charge basis. As a result, the reverse charge mechanism does not apply to the reimbursement of actual expenses to a company's full-time director who is also an employee.

"Section 15(2) of the CGST Act 2017 says about what all shall be included in the value of supply. Based on the same, we conclude that the reverse charge is to be calculated on the gross consideration paid or payable to the supplier, i.e., the values excluding GST," the AAR ruled.

Applicant's Name: Yaadvi Scientific Solutions Private Limited

Date: 02.12.2022

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