In re Venkatasamy Jagganathan (GST AAR Tamil Nadu)
Will the profit sharing agreement between the applicant as an employee and the shareholders, attract GST in his hands?
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.
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING TAMIL NADU
Note: Any Appeal against the Advance Ruling order shall be filed before the Tamil Nadu State Appellate Authority for Advance Ruling, ………………………………………… 2017 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.
2. 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 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.
3. The Authorized Representative of the Applicant was heard on 22.02.2019 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 26.02.2019, has stated that, he is employed with 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 3rd August 2006 along with the terms and conditions attached to the appointment which is for a period of 5 years from 17.06.2005. 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 17.06.2020. 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 …………………………. 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 25th May 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 21/09/2017 have intimated him regarding the approvals of the Board, shareholders in the twelfth Annual General Meeting and IRDAI’s acknowledgement vide their mail dated 28/08/2017. IRDAI in the said letter has mentioned that he will be entitled for additional payment in accordance with the terms of the PSA.
4.3 The applicant has represented the following:
> Approval of IRDAI as required in Para 2 of the agreement ,denotes the fact that the remuneration by way of profit sharing through the PSA is notified as per the provisions of section 34A of Insurance Act, 1938 as that available to the applicant as the CMD of the Insurer viz., SHA
> The agreement is not only among the shareholders and the applicant but is also with other employees of SHA, who the applicant nominates are eligible for the profit share, along with the applicant for additional Entitlement. This concludes that it is only by virtue of the employee contract with the employer and in their performance as an employee, they are being remunerated in this profit sharing.
> As per Para 4.2.1, on termination of employment with cause, the applicant will be forfeited of this right to receive remuneration under this agreement, on the date of termination. By virtue of the clause, it may be noted that the PSA is only based on the employment contract of the applicant with SHA
> The agreement is binding on all the other shareholders listed in Schedule I of the agreement including the applicant himself.
> This share in the profits can be perceived as remuneration for the efforts by the applicant and there can be no GST on efforts for performance rendered to the Company as an employee. Being remunerated for achieving good results through aggressive efforts by virtue of employment for the company will not tantamount to supply of goods or service under Schedule III of CGST Act.
> This profit sharing is in no way payable on a specific or a special piece of work other than his role as a CMD employed under the terms and conditions of the employment contract. The Strategic sale or an IPO is only an occurrence by itself in the normal course of functions/business of and by the Company itself and he is in no way assigned the specific task of going for a Strategic Sale or an IPO.
> Under the Circumstances, where employee in terms of Contractual agreement of employment, after obtaining the approval for being remunerated through the PSA from the Board of Directors, Annual General Meeting and IRDAI, the said Profit Sharing Agreement dated 25th May 2017 falls under Schedule III of CGST Act, wherein services by employee to employer in the course of or in relation to his employment is considered as neither a supply of goods nor a supply of services.
In light of the above, the applicant has requested a ruling about the confirmation of non-applicability of GST to the Profit Sharing Agreement.
5. The submissions of the applicant were examined. The applicant is employed in Star Health and Allied Insurance Company Limited (SHA), a general insurance company with focus on health insurance, as Chairman and Managing Director.
It is seen from the Memorandum of Association dt 03.06.2005 of the company that it is a company limited by shares and that the applicant is one of the 7 subscribers of such shares with 0.4% share. The applicant was appointed as the first Managing Director of the company appointed on 03.08.2006. Subsequently, the applicant was also allotted sweat equity shares in 2007 with the approval of IRDA. His appointment as Chairman cum Managing Director was also extended, with the current term upto two years from 17.06.2018. The applicant has entered into a `Profit Sharing Agreement agreement dated 25th day of May 2017 . It is seen that
