2019 (2) TMI 1004 - AAAR - GST

GST applies to unredeemed loyalty program points after expiry period, revenue from expired points taxable

The AAAR, Haryana upheld GST liability on unredeemed loyalty program points. The appellant company operated a reward point system where partners paid ... Levy of GST - actionable claims or not - amount of issuance fee retained/forfeited by LSRPL - reward point based loyalty programme - challenge to Advance ruling decision - Held that:- It is very clear that the loyalty programme is a programme devised with the aim of generating and maintaining customer loyalty towards the partners entering into agreement with the appellants for the running and managing the overall scheme - It is not the appellant’s case that consideration for maintaining and facilitating encashment of payback points is flowing from the end customers. In fact it is admitted position that the amount received upfront from the Partners in respect of the generated payback points is booked as revenue in their account. The consideration for total payback points including those becoming unredeemed ones after validity period, has flowed from the Partners - this consideration has two components - fixed and variable. The fixed component is what has been received by the appellants by the name of Management Fee and the variable component is the amount booked as revenue in respect of the unredeemed leftover payback points. Appellant’s contention that AAR has admitted that payback points are in the nature of actionable claim and therefore any consideration is out of the provision of GST is grossly misplaced. In fact Appellant is in possession of points and revenue at their end. Whenever customers claim/ redeem the points it is their liability to honour the claim of Customers. However when there can be no claims by the end-customers after the expiry of validity period, these are no more actionable claims. These stand lapsed at the end of the Customers and Appellant treat the redeemed money as revenue which can never be described as any claim against anyone. The consideration for the unredeemed payback points has already flowed from the Partners. After validity period the same has become appellant’s revenue by virtue of the contract for servicing of the loyalty scheme including the points ibid, executed between the Partners and the appellants. Even if it is admitted that there is a provisioning of service by the appellant to the end-customers, there cannot be any such service or actionable claim against the payback points not redeemed by them against anyone. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:1. Whether the value of points forfeited by the appellant, on which money has been paid by the issuer of points due to the failure of end customers to redeem the payback points within their validity period, amounts to consideration for 'actionable claim' other than lottery, gambling, or betting, and therefore would not qualify as supply of either goods or services under the Central Goods and Services Act, 2017, Haryana Goods and Services Act, 2017, or Integrated Goods and Services Tax Act, 2017.2. Whether the value of points forfeited can be treated as 'supply' of any other goods or services and consequently be chargeable to GST under the CGST, HGST, or IGST Act.ISSUE-WISE DETAILED ANALYSISIssue 1: Nature of Forfeited Points as Actionable ClaimsRelevant legal framework and precedents: The definition of 'actionable claim' as per Section 3 of the Transfer of Property Act, 1882, and its inclusion under the definition of 'goods' in Section 2(52) of the CGST Act were considered. The exclusion of actionable claims other than lottery, betting, and gambling from the GST levy was also reviewed.Court's interpretation and reasoning: The Court noted that during their validity period, Payback Points are indeed in the nature of 'actionable claims'. However, after expiry, the points lose their actionable claim status as they can no longer be redeemed by the end customer.Key evidence and findings: The Court observed that the revenue from unredeemed points is retained by the appellant as per the contractual agreement with partners, indicating that the points post-expiry are not actionable claims.Application of law to facts: The Court applied the legal definitions and determined that the forfeited points do not remain actionable claims post-expiry, and thus, the retention of funds by the appellant is not exempt from GST.Treatment of competing arguments: The appellant argued that the points are actionable claims and thus outside GST scope. The Court countered this by emphasizing the change in the nature of the points post-expiry.Conclusions: The Court concluded that post-expiry, the points are not actionable claims and the revenue from them is subject to GST.Issue 2: Forfeited Points as Supply of ServicesRelevant legal framework and precedents: The Court considered the definition of 'supply' under Section 7 of the CGST Act and whether the retention of funds from unredeemed points constitutes a supply of services.Court's interpretation and reasoning: The Court reasoned that the retention of funds from unredeemed points is revenue for services provided to partners, as it forms part of the contractual agreement.Key evidence and findings: The agreement between the appellant and partners indicated that the retention of funds is a component of the management services provided.Application of law to facts: The Court applied the definition of supply and determined that the retention of funds is indeed a supply of services, as it is part of the service agreement with partners.Treatment of competing arguments: The appellant argued that the retention of funds is not a supply of services. The Court refuted this by highlighting the contractual nature of the revenue.Conclusions: The Court concluded that the retention of funds from unredeemed points is a supply of services and is chargeable to GST.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The amount retained by the Appellant due to expiry of Payback Points is therefore liable to be considered as consideration for supply of services by the Appellant to its Partners in the normal course of business.'Core principles established: The judgment established that post-expiry, payback points lose their status as actionable claims and the revenue from them is considered as part of the service supply to partners, thus subject to GST.Final determinations on each issue: The Court dismissed the appeal, upholding the Advance Ruling that the retention of funds from unredeemed points is subject to GST as it constitutes a supply of services.