2019 (7) TMI 1000 - AAR - GST

Liability of GST - Profit Sharing Agreement between the applicant as an employee and the shareholders - actionable claims - scope of supply - HELD THAT - In this case, the profit sharing agreement gives the applicant a claim to the beneficial interest in the profits on the event of a strategic sale where at least 51% of paid up Equity share capital of the company is sold at a price not less than ₹ 75 or an initial public offering where the mid point of the price band as per red-herring prospeectus is not less than ₹ 75 per equity share and subsequent listing on the stock exchange - either of these events may occur or both may not, in that case, the claim is only contingent. This transaction between the applicant and the shareholders is an 'actionable claim' u/s 2(1) of CGST read with section 3 of the Transfer of Property Act, 1882. The 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.

Summary

Issues:
1. Whether the Profit Sharing Agreement between the applicant and shareholders attracts GST?

Analysis:
The case involves an application for Advance Ruling regarding the taxability of a Profit Sharing Agreement (PSA) between the applicant, an employee of a company, and the shareholders. The applicant argued that the profit sharing is a result of his role as the Chairman and Managing Director (CMD) of the company and should be exempt from GST as it falls under employer/employee activities. The applicant provided details of his employment contract, appointment as CMD, and the terms of the PSA, which involved sharing profits from the strategic sale of equity shares. The agreement was approved by the company's Board and shareholders, with acknowledgment from the Insurance Regulatory and Development Authority of India (IRDAI).

The Authority considered the provisions of both the Central Goods and Service Tax Act and the Tamil Nadu Goods and Service Tax Act, noting that they are the same unless specified otherwise. The applicant contended that the profit sharing arrangement was not subject to GST as it constituted an actionable claim, falling under Schedule III of the CGST Act, which excludes activities like lottery, betting, and gambling from the purview of GST. The Authority agreed with the applicant's argument, ruling that the Profit Sharing Agreement between the applicant and the shareholders was an actionable claim and did not qualify as a supply of goods or services under the CGST Act and SGST Act. Therefore, it was held that the agreement was not taxable under CGST or SGST.

In conclusion, the Advance Ruling Authority determined that the Profit Sharing Agreement in question was not subject to GST as it was classified as an actionable claim under Schedule III of the CGST Act and SGST Act, falling outside the scope of taxable goods or services.