No GST on issuance of Prepaid Payment Instrument vouchers

Premier Sales Promotion Pvt Limited Vs Union of India (Karnataka High Court)

Vouchers – Whether Goods or Services, leviable to GST and corresponding GST Credit on same

Background:

The Hon’ble Karnataka High Court in M/s Premier Sales Promotion Pvt Limited v. Union of India [Writ Petition No. 5569 of 2022 (T-RES) dated January 16, 2023] has held that, the issuance of vouchers is similar to pre-deposit instruments, which have no inherent value of their own and therefore, it does not fall under the category of supply of goods or services. Hence, vouchers being neither goods nor services, are exempted from the levy of tax.

Recently, the AAAR, Karnataka in the matter of M/s. Myntra Designs Pvt. Ltd. [KAR/AAAR/03/2023 dated February 24, 2023] has upheld the advance ruling passed by AAR, Karnataka while modifying the findings to arrive at its conclusion and has stated that, a registered person can take Input Tax Credit (“ITC”) subject to conditions and restrictions as per Section 16 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) and the conditions for eligibility of ITC include an inward supply of goods or services, which are charged to tax by the supplier and used or intended to be used in the course or furtherance of business. However, ITC is restricted for non-business use and forms of supply as mentioned in Section 17(5) of the CGST Act.

Facts:

M/s. Myntra Designs Pvt. Ltd. (“the Appellant”) runs an e-commerce portal where fashion and lifestyle products are sold on its portal. In order to promote its business and increase the footfall on the e-commerce portal, the Appellant proposes to run a loyalty program, where loyalty points will be awarded to customers based on their purchases on the portal. The Appellant purchases the vouchers and subscription packages in the form of coupon codes from vendors, who supply the codes on payment of GST and issues them to eligible customers electronically without charging any fees. The customers can redeem the coupon codes on applicable websites or platforms within the validity period.

In this context, the Appellant filed an application before the AAR, Karnataka (“the AAR”) praying for a ruling on whether it would be eligible to avail the ITC as per Section 16 of the CGST 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 accumulated by the said customers.

The AAR ruled on September 14, 2022 (“the Impugned Ruling”) that the Appellant is not eligible to avail ITC as per Section 16 of the CGST Act as the ITC is not available as per Section 17(5)(h) of the CGST Act.

Aggrieved by the advance ruling of the AAR, this appeal has been filed by the Appellant on the grounds that the Section 16(1) of the CGST Act allows them to claim ITC on goods or services used or intended to be used in the course or furtherance of their e-commerce business, regardless of the nature of vouchers and subscription packages and Section 17 (5)(h) of the CGST Act is not applicable to its case.

The Appellant submitted that, that the vouchers and subscription packages cannot be reclassified as ‘goods’ at its end, as they were classified as ‘services’ by the supplier under HS Code 9983 as “other professional, technical and business services”.

The Appellant contended that, the question of classifying the vouchers as ‘gift’, would not arise as vouchers cannot be regarded as ‘goods’ and the bar under Section 17(5)(h) of the CGST Act only applies to ‘goods’.

Further contended that, vouchers and subscription packages are not given as ‘gift’ and that mere absence of a consideration does not lead to the assumption that the issuance of electronic gift vouchers to eligible customers amounts to a ‘gift’ by the Appellant.

Issue:

Whether the Appellant is eligible to claim ITC on vouchers and subscription packages procured by the company from third-party vendors for its loyalty program, as per Section 16 of the CGST Act?

Held:

The AAAR, Karnataka in KAR/AAAR/03/2023 held as under:

• Observed that, the AAR, has approached the issue of ITC eligibility by deciding on whether the vouchers are ‘goods’ or services’ and then arriving at the conclusion, that they are ‘goods’, and has proceeded to deny the ITC 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 CGST Act.
• Analysed Chapter V (Sections 16-19) of the CGST Act, and noted that, a registered person can take ITC subject to conditions and restrictions as per Section 16 and the conditions for eligibility of ITC include an inward supply of goods or services, which are charged to tax by the supplier and used or intended to be used in the course or furtherance of business. However, ITC is restricted for non-business use and forms of supply as mentioned in Section 17(5) of the CGST Act.
• Relied on the judgment of the Hon’ble Karnataka High Court in the matter of M/s. Premier Sales Promotion Pvt Ltd. V. the Union of India [Writ Petition NO. 5569 OF 2022 dated January 16, 2023] discussed supra, wherein, it was held that the vouchers are neither goods nor services and therefore cannot be taxed under the GST.
• Stated that, though the Appellant submitted that the vouchers cannot be considered as gifts to customers, this argument is irrelevant as it is also established that ITC is not eligible on such vouchers.
• Upheld the Impugned Ruling while modifying the findings to arrive at its conclusion.

Relevant Provisions

Section 17(5) of the CGST Act:

“Apportionment of credit and blocked credits-

Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(a) motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:-

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;

(aa) vessels and aircraft except when they are used––

(i) for making the following taxable supplies, namely:-

(A) further supply of such vessels or aircraft; or

(B) transportation of passengers; or

(C) imparting training on navigating such vessels; or

(D) imparting training on flying such aircraft;

(ii) for transportation of goods;

(ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa):

Provided that the input tax credit in respect of such services shall be available-

(i) where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;

(ii) where received by a taxable person engaged-

(I) in the manufacture of such motor vehicles, vessels or aircraft; or

(II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;

(b) the following supply of goods or services or both-

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

(e) goods or services or both on which tax has been paid under section 10;

(f) goods or services or both received by a non-resident taxable person except on goods imported by him;

(g) goods or services or both used for personal consumption;

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

This Writ Petition is presented with the following prayers:

(i) quash the Order number KAR/AAAR/11/2021-22 dated December 22, 2021 passed by the Karnataka Appellate Authority for Advance Ruling;

(ii) issue a suitable writ, order or direction as this Hon’ble Court may deem fit and proper to the Respondents to make suitable provisions in reference to the underlying subject of this writ;

(iii) to pass such other orders, directions and writs as this Hon’ble High Court may deem fit in the facts and circumstances of the case, and in the interests of Justice, including the costs of this writ petition.

2. Heard Shri. G. Shivadass, learned Senior Advocate for the assessee and Shri. Jeevan J. Neeralgi, learned AGA for the Revenue.

3. Briefly stated the facts of the case are, assessee is a registered Company1 engaged in the transactions of procuring Pre-paid Payment Instruments of Gift Vouchers, Cash Back Vouchers and E-Vouchers from the issuers and supplying them to its clients for specified face value. Its clients issue such Vouchers to their employees in the form of incentive or to other beneficiaries under promotional schemes for use as consideration for purchase of goods or services or both as specified therein.

4. Assessee submitted an application2 dated February 23, 2021 before the Karnataka Authority for Advance Ruling, for a Ruling whether the Pre-paid Payment Instruments3 or vouchers themselves, or the act of supplying them is taxable, and at what stage, for each of the three categories of transactions undertaken by the assessee and if the transaction were liable to tax, under which category and what would be the rate of tax applicable?

5. The Advance Ruling Authority, vide Order4 dated July 30, 2021 has ruled that the supply of vouchers is taxable as goods and the time of supply in all the three cases would be governed by Section 12(5) of the Central Goods and Services Tax Act, 20175 and the rate of GST6 as per Entry No. 453 of Schedule 3 of Notification No. 1/2017-Central Tax(Rate) dated June 28, 2017. The assessee challenged the said order before Karnataka Appellate Authority for Advance ruling. The Appellate Authority has affirmed the order passed by the Advance Ruling Authority. Feeling aggrieved, the assessee has presented this writ petition.

6. Shri. G. Shivadass, learned Senior Advocate for the assessee submitted that:

• the RBI7 has issued a master direction8 on issuance and operation of PPIs. Para 9.1(i)(g) of the direction specifically recognizes the PPIs for the purchase of goods and services. The vouchers involved in this case are PPIs which do not disclose the goods and services at the time of issuance;
• since the goods are not identifiable at the time of issuance, as per Section 12(4)(b) of the CGST Act, 2017, the time of supply shall be the date of redemption;
• the voucher would remain only as an instrument till such time it is used for discharging obligation towards the supply of goods or services. At best voucher can be considered as an actionable claim defined in Section 2(1) of the CGST Act till it is presented for redemption. Such actionable claim is neither goods nor services as defined in Schedule-III of the CGST Act;
• actual supply of goods or services takes place only when the voucher is presented for redemption by a customer to a supply of goods and services except when the voucher itself identifies the goods or services for the value mentioned in the voucher. The voucher would remain to be an instrument till the time of redemption. Therefore, the impugned Order passed by the Advance Ruling Authority is contrary to law.

7. Shri. G. Shivadass has placed reliance on following authorities:

• Sodexo SVC India Private Ltd. Vs. State of Maharashtra9,
• M/s. Kalyan Jewellers India10 (Appeal filed u/s 100(1) of the Tamil Nadu Goods and Services Tax Act, 2017/Central Goods and Services Tax Act, 2017)

8. Shri. Jeevan J. Neeralgi, learned AGA for the Revenue opposing the writ petition submitted that the assessee would be knowing precisely what is offered to the customer. Therefore, it cannot be held that goods are not identifiable. With regard to the authority in M/s. Kalyan Jewellers India, he submitted that the parties involved in that case were Kalyan Jewellers and his customers. Therefore, on facts, the principle is not applicable to the case on hand.

9. We have carefully considered rival contention and perused the records.

10. Undisputed facts of the case are, assessee is a Company engaged in the transaction of procuring PPIs of Gift Vouchers, Cash Back Vouchers and E-Vouchers from the issuers and supplying them to its clients for specified face value. The clients issue them to their employees in the form of incentive or to other beneficiaries under promotional schemes for use as consideration for purchase of goods or services or both as specified therein. Assessee receives orders for supply of e-vouchers wherein the assessee sources e-vouchers for such clients as per the orders received and acts as an intermediary between the assessee and the supplier of e-vouchers.

11. The argument of Shri. Shivadass in substance is, the voucher, when accepted shall be consideration or part-consideration for supply of goods or services or both and the voucher itself cannot be treated as goods or services.

12. Thus, the question that falls for consideration is, whether in the facts of this case, vouchers themselves are chargeable to tax at the time of supply or chargeable when goods and services are redeemed?

13. Under Section 2(75) of the CGST Act, 2017, “Money” is defined as under:

“Money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.

(Emphasis Supplied)

14. Under Section 2(118) of the CGST Act, 2017, “Voucher” is defined thus:

“Voucher” means an instrument where there is an obligation to accept it as consideration or part consideration for a supply of goods or services or both and where the goods or services or both to be supplied or the identities of their potential suppliers are either indicated on the instrument itself or in related documentation, including the terms and conditions of use of such instrument.”

15. Shri. Shivadass’s contention is, ‘vouchers’ are recognised by the RBI as ‘payment instrument’ to be accepted as consideration or part-consideration for supply of goods and services. However, the vouchers themselves cannot be treated as ‘goods or services’ for the purpose of levy of GST. When the vouchers do not have any intrinsic value and they represent the value of future goods or services to be redeemed, the levy of tax on the vouchers is without authority of law and it also amounts to multiple levy of taxes.

16. The definition of ‘vouchers’ as defined under the CGST Act, makes it clear that vouchers are mere instruments accepted as consideration for supply of goods or services. They have no inherent value of their own. As vouchers are considered as instruments, they would fall under the definition of ‘money’, defined under CGST Act. The CGST Act excludes ‘money’ from the definition of goods and service and therefore not leviable to tax.

17. In Union of India Vs. Delhi Chit Fund Association,11 the Delhi High Court has held thus:

“10. A mere transaction in money represents the gross value of the transaction. But what is chargeable to service tax is not the transaction in money itself since it can by no means be considered as a service.”

18. It is clear from the above authority that mere transaction of money or actionable claim, no services are involved and therefore no tax is leviable.

19. In Sodexo SVC India Pvt. Ltd (supra), relied upon by the assessee, the Apex Court held as follows:

“15. We have already taken note of the nature of the transaction. After going through the relevant provisions and the principle laid down in various judgments explaining the features of ‘services’ and ‘goods’, we are of the opinion that the Sodexo Meal Vouchers cannot be treated as ‘goods’ for the purpose of levy of Octroi or LBT…”

(Emphasis Supplied)

20. In M/s Kalyan Jewellers (supra), it is observed thus:

“7.9. To conclude, when a voucher is issued, though it is just a means of advance payment of consideration for a future supply, sub-section (4) of section 12 and 13 determine the time of supply of the underlying good(s) or service(s). Voucher per se is neither a goods not a service. It is a means of payment of consideration.”

(Emphasis Supplied)

21. It is not in dispute that the vouchers involved in the instant petition are semi-closed PPIs in which the goods or services to be redeemed are not identified at the time of issuance. Vouchers are distributed to its employees or the customers which can be redeemed by them. These PPIs do not permit cash withdrawal, irrespective of whether they are issued by banks or non-banking Companies and they can be issued only with the prior approval of RBI.

22. In substance the transaction between the assessee and his clients is procurement of printed forms and their delivery. The printed forms are like currency. The value printed on the form can be transacted only at the time of redemption of the voucher and not at the time of delivery of vouchers to assessee’s client. Therefore, the issuance of vouchers is similar to pre-deposit and not supply of goods or services. Hence, vouchers are neither goods nor services and therefore cannot be taxed.

23. In view of the above discussion, this writ petition merits consideration. Hence the following:

ORDER

(a) Writ petition is allowed.

(b) Order dated December 22, 2021 passed by The Karnataka Authority for Advance Ruling and the order no. KAR/AAAR/11/2021-22 dated December 22, 2021 passed by the Appellate Authority affirming the order passed by the Advance Ruling Authority are quashed holding that vouchers do not fall under the category of goods and services and they are exempted from levy of tax.

No costs.

Notes:-

1 registered under the Companies Act, 1956

2 FORM GST ARA 01

3 ‘PPI’ for short

4 KAR/ADRG 37/2021

5 ‘the CGST Act’ for short

6 Goods and Services Tax

7 Reserve Bank of India

8 DPSS.CO.PD.No.1164/02.14.006/2017-18

9 2016 (331) ELT 23 (SC) (para 15)

10 AAAR/11/2021 (para 7.9)a

11 W.P. (C) 4512/2012

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(Author can be reached at info@a2ztaxcorp.com)