VOUCHERS ARE NEITHER GOODS NOR SERVICES - NO INPUT TAX CREDIT

[Mr. M. GOVINDARAJAN]

In re ‘Myntra Designs Private Limited’ - 2023 (3) TMI 107 - AAAR, Karnataka, the Appellant owns an e-commerce portal www.myntra.com. and is a major Indian fashion e-commerce company. The Appellant being engaged in the business of selling of fashion and lifestyle products through the said e-commerce portal, the Appellant proposes to run a loyalty programme where loyalty points will be awarded on the basis of purchases made by the customer on its e-commerce platform.  The Appellant through its portal, made the vouchers and subscription packages available to those customers who wish to redeem the loyalty points earned / accumulated.

The appellant wanted to seek an advance ruling from the Authority for Advance Ruling for the question as to whether the appellant (applicant) would be eligible to avail the input tax credit, in terms of Section 16 of the Central Goods and Services Tax Act, 2017 (‘Act’ for short) on the vouchers and subscription packages procured by the appellant 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. The Authority for Advance Ruling gave the ruling that the appellant is not eligible to avail input tax credit, in terms of Section 16 of the Act, 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 Act, which provides that input tax credit is not available for the goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.

Being aggrieved against the ruling of the Authority for Advance Ruling the appellant filed the present appeal before the Appellate Authority for Advance Ruling. The appellant submitted the following before the Appellate Authority for Advance Ruling-

• It is clear from the provisions of Section 16 that input tax credit of tax paid on goods or services or both, used or intended to be used in the course or furtherance of business, is available under Section 16(1) of the Act.
• Irrespective of the nature of vouchers and subscription packages that will be procured by the Appellant on payment of tax, input tax credit of such tax paid is available under Section 16(1) of the Act.
• The proposed loyalty program would be wholly and exclusively for the purpose of its business as an e-commerce platform claim of input tax credit cannot be denied.
• The classification of vouchers and subscription packages as ‘goods’ or ‘services’ is totally irrelevant for the purpose of claiming input tax credit under the provision of Section 16 (1).
• The phrase 'in the course or furtherance of business' used in Section 16(1) of the Act will include all the activities which would ensue in growth and profitability of the business including marketing, advertisement, promotions and any other activity which would broaden the reach of the business.
• The procurement of vouchers and subscription packages by the Appellant will be essentially in the nature of marketing spend to promote its e-commerce business and therefore, input tax credit of the tax paid cannot be restricted.
• Once vouchers and subscription packages have been classified as services at the supplier's end, the same cannot be reclassified as ‘goods’ at the Appellant's end as has erroneously been done by the Authority for Advance Ruling in the impugned ruling.
• The suppliers have classified the vouchers and subscription packages as ‘services’ under HS Code 9983 as ‘other professional, technical and business services’.
• The Authority for Advance Ruling has erroneously concluded that vouchers and subscription packages are ‘goods’ on the premise that they are movable property which are capable of being transmitted electronically or supplied physically
• The Authority for Advance Ruling has failed to consider that even if the vouchers and subscription packages are considered as ‘goods’, the same are not provided by the Appellant to its customers as 'gift' and therefore Section 17(5)(h) has no application in the facts and circumstances of the present case.
• The consideration would be already accounted for in the commission earned charged from the sellers as determined by the Appellant and on which applicable GST would be discharged; that a transaction cannot be called as ‘gift’ merely because consideration is not explicitly specified.
• The procurement of vouchers and subscription packages is in the nature of marketing expense undertaken by the Appellant to promote its e-commerce business.
• The Authority for Advance Ruling has erred in holding that merely because the loyalty points do not have any monetary value associated with them and cannot be converted into cash or used in place of cash and cannot be used in exchange for cash.
• Once it is established that vouchers and subscription packages provided by the Appellant do not qualify as ‘goods’ or ‘gift’, the applicability of Section 17(5)(h) cannot be sustained.

Personal hearing was granted to the appellant by the Appellate Authority for advance Ruling. In the personal hearing the appellant submitted the following-

• The Appellant does not issue the vouchers but purchases them from elsewhere.
• The vendor who supplies the vouchers to the Appellant raises an invoice under SAC 9983 on payment of GST.
• The Appellant fulfils all the conditions for availing input tax credit as laid down in Section 16 of the Act and also are not restricted by any of the provisions of Section 17.
• The provisions of Section 17(5)(h) will not apply in their case since the inward supply in question is received as a service and not goods; that this is a business expenditure and so it is in fact for the furtherance of business and hence eligible for credit under Section 16.
• The vouchers given to the customers are not a gift in as much as there is a contractual obligation between the Appellant and the customer.
• The cost of the vouchers is a business expense incurred for the furtherance of business is sufficient compliance to Section 16 and input tax credit is eligible.
• The Appellant does not issue the vouchers; the vouchers are non-tradable and non-transferable.
• The expenses incurred by the Appellant in the purchase of vouchers is recovered by them at the time of sale of goods and services on their platform using the vouchers.

The Appellate Authority for Advance Ruling considered the submissions of the Appellant and also analyzed the facts of the case. The Appellate Authority for Advance Ruling analyzed the provisions of Sections 16 to 19 of the Act. It observed that the primary conditions for eligibility of input tax credit is that there should be an inward supply of either goods or services or both; such inward supply should be charged to tax by the supplier and such inward supply should necessarily be used or intended to be used in the furtherance of business.  The lower Authority has approached the issue of input tax credit eligibility by first deciding on whether the vouchers are ‘goods’ or ‘services’ and after arriving at a conclusion that they are ‘goods’, has proceeded to deny the input tax credit on the grounds that the vouchers are ‘gifts’ given to the customers and hence ineligible for credit in terms of Section 17(5)(h) of the Act.

The Appellate Authority for Advance Ruling noted that the participation in loyalty programme is based on meeting the pre-defined eligibility criteria and subject to acceptance of the terms and conditions by the customer while loyalty points are non-transferable (cannot be converted into cash). According to Appellate Authority for Advance Ruling, redemption of loyalty points by customer for receiving the vouchers implies that the vouchers are issued free of cost and amounts to disposal of vouchers (goods) by way of gift which is squarely covered under section 17 (5)(h) of the Act.

The Appellate Authority for Advance Ruling ruled that the vouchers are held to be neither goods nor services and cannot be taxed under the GST. Therefore, when the vouchers intended to be procured by the appellant are neither goods nor services, the question of eligibility for input tax credit does not arise.