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July 3, 2020

Redemption of payback points is to be treated as “Supply of Services” in GST

by Rubina Dsouza in GST

Redemption of payback points is to be treated as “Supply of Services” in GST


Although actionable claims have been included in the definition of ‘goods’ in CGST Act, actionable claims other than lottery, betting and gambling have been specified as a transactions which shall be treated neither as supply of goods nor as supply of service under Schedule III of the  CGST Act.  Therefore, only actionable claims in the nature of lottery tickets, betting and gambling will be taxed as supply of goods under GST.

Whether redemption of payback points under a loyalty programme are to be treated as ‘supply of services’ liable to GST or the same will remain as actionable claims which are not taxable under GST?

Let us refer to the case of Loyalty Solutions and Research Pvt Ltd (AAAR Ruling 2019), where ruling was sought on the issue.

Facts of the Case:-

  1. The appellant owns and operates a reward point based loyalty programme that is integrated towards it partners and their customers.
  2. The applicant is managing the customer loyalty programme for its clients/partners, which is based on issuance of reward points also known as payback points by the applicant to end customers.
  3. These reward payment points have value of 0.25 INR each.
  4. For managing this loyalty programme, appellant is getting Management and service fee.
  5. Appellant is paying GST on the management fee as well service charges charged by them.

Pattern of loyalty programme by appellant is as follows:-

  1. On purchase of products of “partners” under this loyalty programme, end-customers get reward/payment points
  2. These rewards points can be redeemed by customers, while making future purchases of products of “partners”.
  3. The “partner” transfers amount equivalent to 0.25 of INR, per reward point, as issuance charges to appellant.
  4. Whenever any purchase is made by end customer, by using/redeeming rewards points, appellant transfers amount equivalent to 0.25 INR per reward point used to the concerned store
  5. The concerned store gives discounts on the payment to be received from end-customer to this extent.
  6. The rewards points have a validity period of 36 months, meaning thereby that the customer cannot redeem these reward points, after expiry of 36 months from the date of issuance
  7. It may happen that the customer does not or is not able to redeem the rewards points, within their validity period of 36 months from the date of issue.

Appeal to AAR

  1. The appellant had sought advance ruling on the point that whether the value of points forfeited on which money had been paid by the issuer but there is a failure of the end customers to redeem the payback points within their validity period would amount to consideration for ‘actionable claim’ be subject to GST?
  2. The Haryana AAR held that, amount retained by appellant due to expiry of Payback points constitutes a consideration for supply of services by appellant to its clients.
  3. The lapsed points no longer remain ‘actionable claim’. However, unexpired payback points might have fallen within the meaning of ‘actionable claim’.
  4. The value of points forfeited and retained amounts to the consideration received in lieu of services provided by the appellant and thus would be outside the scope of being considered as actionable claim and hence to be treated as supply of services for the purpose of levy of GST.

Appeal to AAAR

The question being agitated by the appellant on which advance ruling was sought to the AAAR are as follows:

  1. Whether the nature of payback points, which are considered as actionable claim during their validity period in the order of AAR, changes post expiration of their validity period? And the amount retained by the applicant on account of such expiration is therefore liable to be added to the value of taxable supplies made by the applicant?
  2. How can Payback points which are considered as “goods” during their validity period become a supply of “service” post-expiration?

Observation of AAAR pertaining to the Loyalty Programme

Revenue from the unredeemed payback points by the appellant does not qualify to be actionable claims

  1. According to Section 2(1) of CGST Act, Actionable claim will have the significance assigned to it in section 3 of the Transfer of Property Act, 1882 (4 of 1882), which refers to a claim on any unsecured debt or any beneficial interest in movable property of the claimant.
  2. According to section 3 of the Transfer of Property Act, 1882, actionable claim” means a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent
  3. All kinds of actionable claims have been recognised as Goods in the GST Law.
  4. According to section 2(52) of the CGST Act, 2017 “goods” means every kind of movable property other than money and securities but includes actionable claim; growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply
  5. Thus under the GST law, there are only 3 types of supplies – Supply of goods or services or both. Supplies of all actionable claims are the supply of goods under GST law.
  6. Thus, the amounts accounted for as revenue from the unredeemed payback points by the appellant, do not qualify to be actionable claims.

There are no invoices issuable for the Actionable claims

  1. The unredeemed, payback points by the appellant do not qualify to be actionable claims.
  2. Admittedly, the appellants receive payment against the total generated points, upfront in terms of the contract executed with the, partners, and record the same as their accounts.
  3. Obviously the payment received from ‘Partners’ and the accounted for as Revenue forms the consideration against the contracted services for the appellant.

Appellant is the issuer and managers of the loyalty program; the program /scheme is open to end-customers and they can independently enroll for the program under which there are numerous partners and the payback points can be redeemed through several partners.

  1. It is observed that no services have been provided by the Appellants to the end-customers against the unredeemed points by the end customers.
  2. In view of this fact, the ownership of the loyalty program and its management has no bearing on the nature of the amount generated on account of unredeemed payback points.

Appellant are the generators and issuers of the payback points

  1. It is observed that as a manager and operator of the Loyalty scheme, the appellant is surely generators of the program but the points can never be generated unless there is a transaction between the end-customers and the partners.
  2. It is observed that necessary financial back-up for the generation and redemption of the points is provisioned by the partners, the generation forms a component of the overall functioning of the scheme by the appellant.

End-customers can directly sue them for non redemption or deficiency of service; they have the option to sue them directly or the partner from the purchases with whom the points were generated

  1. The loyalty program is aimed at generating, maintaining and retaining the end-customer’s loyalty towards the partners, for the requisite supplies.
  2. The end-customers undertaking the transaction identifies the Partner as the provider of the payback points and for the remedy for any deficiency in servicing of the promised payback points will naturally tend to turn up to sue the partner.
  3. As such the handling of opted suing by the end-customers of the appellant is merely a facility undertaken by the appellant on behalf of the Partners and forms a service by the appellant against consideration from Partners.
  4. Moreover the services are rendered by the Appellant to the Partners and nature of Appellants’ relationship with end-customers is part of their contract/concept.
  5. For taxation matters the relation between Appellants and end-customers has no bearing on the relationship between Appellant and the vendor partners. Whatever revenue is accruing to them is from the vender partners only. End customers are nowhere in the scheme of things as for as supply of services is concerned.

Contention of the Appellant that they are selling the payback points which are actionable claims therefore their revenue has resulted from the sale of payback points/ actionable claims

  1. Appellant is not selling any payback points but are providing a facility by way of a software programme to the partners to help partners generate and retain loyalty of the customers undertaking any transactions with them
  2. Even if it is deemed for arguments sake that the appellant is selling the payback points, the consideration flows to them for the same partners only.
  3. Admittedly the transaction linked generation of payback points is a part of the service package for the overall management of the scheme by the appellants.
  4. Making available of the payback points to the end-customers is also not the selling of these points to the end-customers as the consideration for the same is coming from the partners only.
  5. In fact there is no service either to the end customers, by the appellants on the same point that the consideration for the payback points or their maintenance and facilitation of redemption is flowing from the partners and by virtue of agreements executed between the appellants and the Partners.

Appellant charges ‘Management fee’ from the partners and the amount incurring on account of unredeemed points has no bearing on the consideration for the services provided to the partners because in several cases 100% of the generated points get redeemed and no income occurs on account of unredeemed payback points

  1. It is observed that the since entire consideration for the provided services is flowing from the partners under the same contract, the consideration flowing comprises of 2 components – fixed and variable.
  2. The fixed component is called management fee and the amount occurring on account of the leftover unredeemed payback points is the 2nd variable component of service charges.

Findings of AAAR

  1. 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.
  2. It is an admitted position that the amount received upfront from the Partners w.r.t the generated payback points is booked as revenue in the appellant’s account.
  3. The consideration for total payback points including those becoming unredeemed ones after validity period, has flowed from the partners.
  4. AAAR observed that this consideration has 2 components – fixed and variable. The fixed component is what has been received by the appellants by the name ‘management fee’ & the variable component is the amount booked as revenue w.r.t the unredeemed leftover payback points.
  5. 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.
  6. 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 & the appellant treats the redeemed money as revenue, which can never be treated as claim against anyone.
  7. The consideration for the unredeemed payback points has already flowed from the Partners.
  8. After validity period, the same has become the appellant’s revenue by virtue of the contract of servicing of the loyalty scheme including the points executed between the Partners & the Appellants.
  9. Even if it is admitted that there is a provisioning of service by the appellant to the end customers, there cannot be any service or actionable claim against the payback points not redeemed by them against anyone.

The AAAR thus upheld the ruling passed by Haryana AAR. The amount retained by the applicant on account of expiration of the loyalty points is liable to be added to the value of taxable supplies made by the applicant as there is a supply of service.

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