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Applicability of GST on Profit Sharing Agreement between applicant as an employee and the shareholder
2019 TaxPub(GST) 0683 (AAR-TN)
IN THE AUTHORITY FOR ADVANCE RULING, TAMILNADU BENCH
MANASA GANGOTRI KATA, IRS & THIRU KURINJI SELVAAN V.S., M.SC. (AGRI.), M.B.A., MEMBER
Venkatasamy Jagannathan, In re
Order No. TN/19/AAR/2019
21 May, 2019
Note: Any appeal against the Advance Ruling order shall be filed before the Tamil Nadu State Appellate Authority for Advance Ruling, Chennai within 30 days from the date on which the ruling sought to be appealed against is communicated.
At the outset, we would like to make it clear that the provisions of both the Central Goods and Service Tax Act and the Tamil Nadu Goods and Service Tax Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the Central Goods and Service Tax Act would also mean a reference to the same provisions under the Tamil Nadu Goods and Service Tax Act.
Shri. Venkatasamy Jagannathan, No. 32/69, CEEBROS Apartments, Ragaveera Avenue, Poes Garden, Chennai-600086 (hereinafter called the Applicant) is employed in Star Health and Allied Insurance Company Limited (hereinafter referred to as SHA) as Chairman and Managing Director and also a Stake holder in the said company. The applicant has preferred an application seeking Advance Ruling on the following :–
Will the Profit Sharing Agreement between the applicant as an employee and the shareholders, attract GST in his hands?
The Applicant has submitted the copy of application in Form GST ARA–01 and also submitted the copy of Challan evidencing payment of application fees of Rs. 5,000 each under sub-rule (1) of rule 104 of CGST rules 2017 and SGST Rules 2017.
- The Applicant has stated that is not rendering any services to any outsider nor is a registered dealer. The Applicant has entered into a Profit Sharing Agreement (hereinafter referred to as PSA) on 25-5-2017 in which the applicant will get a profit for a strategic sale of equity shares over and above a specified sale price per equity share by a set of shareholders of SHA. The value of shares has increased since and a strategic sale is imminent. The applicant states that the arrangement of profit sharing is by virtue of his employment in SHA as a CMD. The value of shares of any corporate entity will be subject to an increase/decrease in its value based on a lot of parameters not limited to the perception of the market, supply and demand of the share, performance of the company etc. Hence, the applicant states that GST is not applicable on this profit sharing arrangement which will only arise from and out of his role as an employee of the company.
- The Authorized Representative of the Applicant was heard on 22-2-2019 in the matter. They stated that the Profit Sharing Agreement is only due to the contribution of the applicant as Managing Director and hence it is under employer/employee activities which are exempt under GST. They stated that they will submit original appointment/Contract of employment, Board resolutions, IRDA approval of appointment and also Profit Sharing Agreement along with relevant rules and section 34A under IRDA and any amendments over a period of time. In this case, the strategic sale is yet to take place. This agreement will terminate if the employment is terminated. The contribution of the MD (also one of the Original Share Holder) is acknowledged in this agreement.
4.1 The Applicant in their written submissions dt 26-2-2019, has stated that, he is employed SHA as Chairman and Managing Director by virtue of his contract as mentioned in the Articles of Association of the Company under clause 123 of the Company and also vide an appointment letter, dated 3-8-2006 along with the terms and conditions attached to the appointment which is for a period of 5 years from 17-6-2005. The IRDAI has approved his appointment as CMD. His contract of employment for appointing/re-appointing to serve as a CMD for SHA is duly made through and approved by the Board of Directors of SHA. All the appointment/re-appointments are presented by the Board to IRDAI for its approval and are approved by IRDAI as per section 34A of the Insurance Act, 1938 all emoluments payable to a Chairman cum Managing Director is required to be submitted for IRDAI’s notice/approval. His current appointment is till 17-6-2020. In 2007, sweat equity shares were allotted to him with the approval of IRDA.
4.2 By virtue of his employment, he has entered into an agreement, dated 25th day of May 2017 that if not less than 51% of the equity shares are transferred In a strategic sale or on listing of the Shares after an IPO at a price of not less than Rs. 75 per share, then the economic benefit arising of such sale or an IPO (the difference between the sale price and the base price of Rs. 47 per share) will be passed on to him by the shareholders to the extent of the number of shares mentioned in the agreement (that is 93,45,151 and 23,36,288 in toto 1,16,81,439 number of equity shares of in case of an IPO, the consideration payment to the CMD by each party shall be the percentage of the holding of the parties on the total shareholding of SHA. The PSA has also been duly approved by the Board of the Company on 25-5-2017. The approval of the Shareholders was sought vide Twelfth Annual General Meeting held on 26th day of July 2017. SHA vide their letter, dated 21-9-2017 have intimated him regarding the approvals of the Board, shareholders in the twelfth Annual General Meeting and IRDAI’s acknowledgement vide their mail, dated 28-8-2017. IRDAI in the said letter has mentioned that he will be entitled for additional payment in accordance with the terms of the PSA.
6.4 Schedule III to CGST Act states :–
Activities or transactions which shall be treated neither as a supply of goods
Nor a supply of services
- Actionable claims, other than lottery, betting and gambling.
Therefore, actionable claims other than lottery, betting, gambling are activities or transactions which shall be treated neither as a supply of goods nor a supply of services and hence do not attract GST as per CGST or SGST ACT. The Profit Sharing Agreement between the applicant and various shareholders of SHA is an actionable claim and is not relating to lottery, betting and gambling and hence, is covered under Schedule III to CGST Act and SGST Act as neither a supply of goods nor a supply of services and hence is not taxable to CGST or SGST.
- In view of the above, we rule as under :–
The Profit Sharing Agreement between the applicant ad various shareholders of SHA is an actionable claim and is as neither a supply of goods nor a supply of services covered under Schedule III to CGST Act and SGST Act and hence is not taxable to CGST or SGST