Situation-
For the service of managing loyalty points, XYZ Pvt Ltd (The Company) receives a sum of Rs.0.XX per point taken over and an admin fee of Rs.0.YY per point.
Issue involved-
What are the tax implications of the transactions viz. assignment of points & admin fees received?
Opinion-
The various tax implications are explained below-
For admin fees-
There is no doubt that the income receivable as admin fees would be subject to TDS by the paying entity. The company would charge Service tax on the service charges (admin fees) and the paying entity would remit only the amount after deduction of tax at source and the balance would be received as TDS certificates which would be used for availing tax credit.
For the sum of Rs.0.XX per point-
It has to be understood here that the entire amount paid to the Company is not its income. There is an element of contingency attached to it. The amount would be materialize as income only if the points lapse. Here the paying entity is just assigning its contingent liability to the Company at a price. It can by no stretch of imagination be assumed that the entire points assigned would lapse as in that case the paying entity would never pay any consideration for assignment of the same. It is pretty much like passing on a liability which may or may not arise.
Take the case of Income of an insurance company. No tax is deducted on payment of insurance premium to the insurance company even though the premium is an income for the insurance company. This is because the entire premium is not its income as a contingent liability is attached to it. Even in case of (The Company), the income amount cannot be determined with certainty as it is contingent upon the lapsing of the points assigned.
Using the above logic, as income is uncertain, TDS would not be applicable.
Another argument can be that, the transaction is pretty much a purchase of the contingent liability by (The Company ). So the purchase consideration cannot be subject to TDS.
Summary-
1. Admin fees would be subject to TDS.
2. Charges for assignment of points should not be subject to TDS.
Disclaimer-
The above note is our personal opinion and any application of the same should not be construed as “advice” and we do not undertake any liability which may arise out of the same at any time.
For the service of managing loyalty points, XYZ Pvt Ltd (The Company) receives a sum of Rs.0.XX per point taken over and an admin fee of Rs.0.YY per point.
Issue involved-
What are the tax implications of the transactions viz. assignment of points & admin fees received?
Opinion-
The various tax implications are explained below-
For admin fees-
There is no doubt that the income receivable as admin fees would be subject to TDS by the paying entity. The company would charge Service tax on the service charges (admin fees) and the paying entity would remit only the amount after deduction of tax at source and the balance would be received as TDS certificates which would be used for availing tax credit.
For the sum of Rs.0.XX per point-
It has to be understood here that the entire amount paid to the Company is not its income. There is an element of contingency attached to it. The amount would be materialize as income only if the points lapse. Here the paying entity is just assigning its contingent liability to the Company at a price. It can by no stretch of imagination be assumed that the entire points assigned would lapse as in that case the paying entity would never pay any consideration for assignment of the same. It is pretty much like passing on a liability which may or may not arise.
Take the case of Income of an insurance company. No tax is deducted on payment of insurance premium to the insurance company even though the premium is an income for the insurance company. This is because the entire premium is not its income as a contingent liability is attached to it. Even in case of (The Company), the income amount cannot be determined with certainty as it is contingent upon the lapsing of the points assigned.
Using the above logic, as income is uncertain, TDS would not be applicable.
Another argument can be that, the transaction is pretty much a purchase of the contingent liability by (The Company ). So the purchase consideration cannot be subject to TDS.
Summary-
1. Admin fees would be subject to TDS.
2. Charges for assignment of points should not be subject to TDS.
Disclaimer-
The above note is our personal opinion and any application of the same should not be construed as “advice” and we do not undertake any liability which may arise out of the same at any time.
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