AAR, Karnataka in its recent ruling in the case of Myntra Designs Pvt Ltd has held that Input Tax Credit (ITC) is not available on the vouchers and subscription packages procured from third party vendors that are made available to the eligible customers participating in the loyalty program against the loyalty points earned / accumulated by the said customers.
Facts of the Case:
- The applicant M/s Myntra Designs Pvt Ltd, is a major Indian fashion e-commerce company & owns an e-commerce portal (www.myntra.com); engaged in the business of selling of fashion and lifestyle products through the portal, The suppliers of such products, intending to sell their products through the applicant’s portal list them on the portal and sell them to customers, who place their order using the applicant’s portal. Once order is placed by the customer, the applicant collects money from them towards the purchase of the said order through its portal in the capacity of an e-commerce portal operator and settles the amount payable with the supplier of the said order within a specified period.
- The Applicant, in order to incentivise the customers visiting the portal / e- commerce platform, proposes to run a loyalty program, by way of issuing points to the customers on the basis of purchases, effected by the customers from various sellers on the said platform. The participation in the proposed loyalty program will be on meeting the pre-defined eligibility criteria laid down by the applicant and the same will be subject to acceptance of the applicant’s terms and conditions. Further the customer will be bound by the said terms and conditions and any changes or modifications to the same by participating in the said program.
- The loyalty program is sought to be introduced with an object of increasing customer base of the applicant’s platform which will lead to increased footfall and sales through the said platform and thus the said loyalty program will directly impact and enhance the amount of commission earned by the Applicant in the course of their business.
Issue on which Ruling was sought:
Whether the applicant would be eligible to avail the input tax credit, in terms of Section 16 of the CGST Act 2017, on the vouchers and subscription packages procured by the applicant from third party vendors that are made available to the eligible customers participating in the loyalty program against the loyalty points earned / accumulated by the said customers.
Order of AAR: Deliberation and Ruling
The Applicant proposes to run a loyalty program where loyalty points will be awarded on the basis of purchase made by the customer on their e-commerce platform. The participation in the said program will be based on meeting the pre-defined eligibility criteria and subject to acceptance of the terms and conditions by the customer. The applicant, through their portal, would make the vouchers and subscription packages available to those customers who wish to redeem the loyalty points accumulated by them and the applicant will not receive any monetary consideration from the said customers. Further the loyalty points are non-transferable, can’t be converted into cash and can’t be used in place of cash. The applicant would be procuring the vouchers, subscription packages, on payment of applicable GST, from third party vendors who would be classifying their supply under SAC 9983 as ‘other professional, technical and business” service.
The applicant primarily contends that they fulfill all the required conditions prescribed under Section 16(1) of the CGST Act 2017 and the inward supply, i.e. procurement of vouchers subscription packages, is classified as a service and thus Section 17(5)(h) is not applicable, thereby allowing the customers to redeem the loyalty points earned for vouchers subscription packages can’t be termed as a ‘gift’ and hence the applicant is eligible to claim the ITC of GST paid on such procurement.
AAR noted that input tax credit is an entitlement to a registered person which can be taken subject to such conditions and restrictions as may be prescribed. In this regard it is seen that Section 17(5) prescribes that input tax credit shall not be available in respect of certain supplies. Further AAR noted that the issue before them is to decide whether the inward supply i.e. the vouchers merits classification as ‘goods’ or ‘service’ and if they are goods, whether they were disposed of by way of gift or otherwise.
AAR observed that it can be seen from the loyalty program that the applicant, on the basis of a particular transaction purchase by the customer through their e-commerce platform and subject to acceptance of the terms and conditions of the applicant by the customer, allows the customer to earn loyalty points. The applicant in the said transaction recovers the full amount from the customer and gives the loyalty points free of cost. Further the said loyalty points, in the applicants own admission, do not have any monetary value, are non-transferable and cannot be converted to cash. The redemption of loyalty points, admittedly involves no flow of consideration from the customer.
Thus redemption of loyalty points by the customer for receiving vouchers from the applicant implies that the vouchers are issued free of cost to the customer and amounts to disposal of vouchers(goods) by way of gift and squarely covered under clause (h) of Section 17(5) of the Act.
In view of above deliberation the AAR held that the applicant is not eligible to avail the input tax credit, in terms of Section 16 of the CGST Act 2017, on the vouchers and subscription packages procured by the applicant from third party vendors that are made available to the eligible customers participating in the loyalty program against the loyalty points earned / accumulated by the said customers, as the input tax credit is not available in terms of Section 17(5)(h) of the CGST Act 2017.
As per Section 17(5)(h) of the CGST Act, 2017 ITC cannot be availed in respect of goods lost, stolen, destroyed, written off or given off as gift or free sample.
READ / DOWNLOAD ORDER:
*****
Don’t miss the next Tax Update / Article / Judicial pronouncement
Subscribe to our newsletter for FREE to stay updated on GST Law
Resolve your GST queries from national level experts on GST free of cost
Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
