Advance Ruling

Name of the Applicant: Venkatasamy Jagannathan Order No. and Order date : 19 /AAR/2019  Dated: 21.05.2019

Authority : AAR(Tamil Nadu)

Questions Sought by the applicant:

Will the Profit Sharing Agreement between the applicant as an employee and the shareholders, attract GST in his hands?   

Brief Facts:

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 25th day of May 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 sharehoders of SHA .

The applicant states that the arrangement of profit sharing is by virtue of his employment in Star Health Agency as a CMD.

Hence, the applicant states that GST is not applicable on this profit sharing arangement which will only arise from and out of his role as an employee of the company.

Submission of the applicant:

By virtue of his employment, he has entered into an agreement dated 25th day of May 2017 that if not less than 50% 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 total 1,16,81,439)

1) The applicant has contended that as per Schedule III of GST Act.

Schedule III to CGST Act states:-

Activities or transactions which shall be treated neither as a supply of goods Nor a supply of services

I. Services by an employee to the employer in the course of or in relation to his employment.

Facts & Findings – As per concerned officer:- 

1) In the instant case, the various parties to the Profit Sharing Agreement who are investors/shareholders of SHA have agreed to pay certain sum in the event of either a Strategic Sale where at least 50% of paid  up Equity Share capital of the Company is sold at a price not less than Rs 75 per equity share or in the event of an initial public offering where the mid-point of the price band as per the red herring prospectus is not less than Rs 75 per equity share and subsequent listing on Stock Exchange. The Entitlement Amount and Additional Entitlement amounts are dependent on the difference of sale price at the time of event to the base price  of Rs 47 per equity share. There is an obligation on part of the other  shareholders mentioned in the Profit Sharing Agreement to pay such  amounts as per the profit share agreement signed by them with the applicant. The applicant has a claim to the specified amounts in the event of occurrence of the specified strategic sale or IPO. His claim is contingent on such events occurring. The applicant has a beneficial interest in the profits arising out of such a strategic sale or IPO. It can be said that the Profit Sharing Agreement is an ‘actionable claim’ .

Section 2(1) of CGST Act Defines:

2. In this Act, unless the context otherwise requires,-

(1) “actionable claim’ shall have the same meaning as assigned to it in section 3 of the Transfer of Property Act 1882;

Section 3 of Transfer of Property Act, 1882 states:

“actionable claim” means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable  property not in the possession, either actual or constructive, of the claimant which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.

In this case, the Profit Sharing Agreement gives the applicant a claim to the beneficial interest in the profits. The moveable property which is the amount of profit on such contingent event occurring are currently not in possession of the claimant i.e. applicant Therefore, it is clear that Civil Courts recognize and can provide grounds for relief if and when the applicant makes a claim to such beneficial interest in future profits Therefore, it is clear that this transaction between the applicant and shareholder is an “actional claim” under Section 2(7) of CGST read with Section 3 of the Transfer of Property Act, 1882

Schedule III to CGST Act states:-

Activities or transactions which shall bc trcated neither as a supply of goods Nor a supply of services

6. Actionable claims, other than lottery, betting and gambling.

Therefore, actionable clains 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 shareholder 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.

Ruling

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.

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