Karnataka authority denies input tax credit on vouchers for loyalty programs under Section 16 CGST Act

AAAR Karnataka dismissed appeal regarding input tax credit eligibility on vouchers and subscription packages procured from third-party vendors for loyalty program customers. The authority held that ITC under Section 16 CGST Act requires inward supply of goods/services used for business furtherance. Since vouchers were neither goods nor services supply as per HC precedent, ITC was denied. The authority clarified that writ jurisdiction review of advance ruling orders is minimal, limited to judicial review principles rather than substantive merits examination.

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Issues Involved:
1. Eligibility to avail Input Tax Credit (ITC) on vouchers and subscription packages.
2. Classification of vouchers and subscription packages as 'goods' or 'services'.
3. Application of Section 17(5)(h) of the CGST Act, 2017 regarding 'gifts'.
4. Determination of whether vouchers and subscription packages are provided 'free of cost'.

Detailed Analysis:

1. Eligibility to avail Input Tax Credit (ITC) on vouchers and subscription packages:
The primary issue is whether the appellant can avail ITC on vouchers and subscription packages procured from third-party vendors. The appellant argued that these are procured for business promotion and hence should be eligible for ITC under Section 16 of the CGST Act, 2017. However, the lower authority denied ITC based on Section 17(5)(h), which restricts ITC on goods given as 'gifts'. The appellate authority upheld the denial of ITC but modified the reasoning, stating that vouchers are neither goods nor services as per the Karnataka High Court's decision in Premier Sales Promotions Pvt Ltd.

2. Classification of vouchers and subscription packages as 'goods' or 'services':
The appellant contended that the vouchers and subscription packages are classified as 'services' by their suppliers under HS Code 9983. They argued that the classification at the supplier's end should be final and cannot be reclassified at the recipient's end. The lower authority classified the vouchers as 'goods' because they are movable property. However, the appellate authority followed the Karnataka High Court's ruling that vouchers are neither goods nor services, thus making the question of classification irrelevant for ITC eligibility.

3. Application of Section 17(5)(h) of the CGST Act, 2017 regarding 'gifts':
The appellant argued that the vouchers and subscription packages are not 'gifts' as they are provided under a contractual obligation and not free of cost. They cited various judicial precedents to support their claim. The lower authority had concluded that these are 'gifts' and thus restricted ITC under Section 17(5)(h). The appellate authority, while agreeing with the denial of ITC, did not delve into whether the vouchers are 'gifts' due to the finding that vouchers are neither goods nor services.

4. Determination of whether vouchers and subscription packages are provided 'free of cost':
The appellant argued that the vouchers are not provided 'free of cost' as they are part of a loyalty program and the cost is accounted for in the commission charged from sellers. They drew parallels with warranty parts provided by manufacturers, which are not considered 'free of cost'. The appellate authority did not find it necessary to address this argument in detail, given the primary finding that vouchers are neither goods nor services.

Conclusion:
The appellate authority rejected the appeal and upheld the advance ruling, denying ITC on the vouchers and subscription packages. The basis for this decision was the Karnataka High Court's ruling that vouchers are neither goods nor services, thus making them ineligible for ITC. The authority modified the lower authority's findings to align with this legal interpretation.

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