In re Adama India Private Limited (GST AAR Gujarat)
ITC ineligible on CSR activities being excluded from normal course of business
The AAR, Gujarat in the matter of M/S. Adama India Private Limited [Advance Ruling No. GUJ/GAAR/R/44/2021 dated August 11, 2021] held that, no Input Tax Credit (ITC) would be available for Corporate Social Responsibility (CSR) activities excluded from normal course of business.
Facts:
M/s. Adama India Private Limited (“the Applicant”), supplies insecticides, fungicides and herbicides. The Applicant has been spending the mandatory amount on CSR activities in the form of donations to the Government relief funds/educational societies, civil works or installation of plant and machinery items in schools or hospitals, distribution of food kits etc. Further, the vendors that supply goods/services to the Applicant for the purpose of undertaking the CSR activities charge GST on their output supplies.
Issue:
Whether ITC would be available of the inputs and input services procured for the purpose of undertaking the CSR activities?
Held:
The AAR, Gujarat in Advance Ruling No. GUJ/GAAR/R/44/2021 dated August 11, 2021 held as under:
- Analysed Rule 2(d) and Rule 4(1) of the Companies (CSR Policy) Rules, 2014(“the CSR Rules”) and noted that the definition of CSR, itself, excluded activities undertaken in pursuance of normal course of business of the company.
- Observed that, the CSR activities undertaken by the company shall exclude activities undertaken in pursuance of its normal course of business and it does not include activities undertaken in pursuance of normal course of business of the company.
- Stated that, a registered person is entitled to take ITC charged on any supply of goods or services or both, which are used or intended to be used in the course or furtherance of his business.
- Held that, the CSR activities are not activities undertaken in pursuance of Applicant’s normal course of business and Section 16(1) of the Central Goods and Services Tax Act, 2017 (“CGST Act“) bars CSR activities from input/input service and therefore not eligible for ITC.
Our comments:
It is to be noted that the companies are statutorily obligated under Section 135(5) of the Companies Act, 2013 (“Companies Act”) to undertake CSR expenditure every Financial Year (“FY”) and non-compliance of these provisions may lead to business disruptions.
As per the definition of term “business” under Section 2(17) of the CGST Act, the term business includes all activities which are incidental / ancillary to any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit.
Since the companies are statutorily obligated to undertake CSR activities in order to run its business, it becomes an essential part of business process as a whole. Therefore, the CSR activities are to be treated as incurred ‘in the course or furtherance of business’ and thus eligible for credit under Section 16(1) of the CGST Act.
Reliance can be placed on the case of M/S. Dwarikesh Sugar Industries Limited [Order No. 52, dated January 22, 2020] wherein AAR, Uttar Pradesh held that expenses incurred towards CSR by the Company in order to comply with requirements under the Companies Act qualify as being incurred in the course of business and therefore, eligible for ITC in terms of the Section 16 of the CGST Act.
Further, CSR activity is mandatory and regular in nature and the company doing CSR activity receives the confidence of stakeholders, public or society and maintain social position in corporate which forms consideration. Thus, GST ITC on CSR activity should be allowed as it is incurred in the course or furtherance of business.
FULL TEXT OF THE ORDER OF AUTHORITY OF ADVANCE RULING, GUJARAT
BRIEF FACTS:
The applicant M/s. Adama India private limited, supplies insecticides, fungicides and herbicides. The applicant submits that as per Section 135 of the Companies Act, 2013, it has been spending the mandatory amount on CSR activities in the form of donations to the Government relief funds/educational societies, civil works or installation of plant and machinery items in schools or hospitals, distribution of food kits etc; that the vendors that supply goods/services to the applicant for the purpose of undertaking the CSR activities charge GST on their output supplies; that the applicant intends to avail the Input Tax Credit(ITC) of the inputs and input services being procured for the purpose of undertaking the CSR activities.
2. The applicant seeks to know whether CSR activities are in the course of furtherance of business and will therefore be counted as eligible ITC in terms of Sections 16 and 17(5) of the CGST Act, 2017.
3. The applicant submitted as follows:-
(i) The applicant is eligible to seek Advance Ruling under Section 95(c) of the CGST Act, 2017 and the question on which they are seeking Advance Ruling is covered under Section 97(2)(d) of the Act.
(ii) Every registered person under GST can avail the ITC of inputs and input services subject to fulfilment of criteria laid down as per Section 16 of the CGST Act, however, the first and foremost condition for availing the ITC of inputs and input services as per Section 16 of the CGST Act is to ensure that the same is being used in the ‘course and furtherance of business. Thus, for any inputs or input services to be come eligible ITC, it is imperative that the same must be used in the course and furtherance of business, although the expression ‘course and furtherance of business’ has nowhere been defined in the GST law. In other words, inputs and input services pertaining to CSR activities being undertaken by the applicant can become eligible ITC if only it is established that such activities are in the course and furtherance of business.
(iii) The term ‘business’ is defined under Section 2(17) of the CGST Act, to include:-
(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;
(iv) The above definition envisages that even an activity or a transaction which is done in connection with the main business operations of the Company shall be covered under the definition of ‘business’ under the GST law. In the present case, the expenses incurred on the CSR activities by the Applicant are a mandatory requirement as per the Companies Act and any disclosure regarding non-compliance of the said requirement will lead to tarnishing the image of the company, lower brand value, lower market standing and lower credit rating.
(v) In view of the above, it is submitted that use of the expression ‘in connection with’ or ‘incidental’ in the aforesaid definition of business purports to expand the scope of the definition so as to include such activities which though might not have a direct bearing on the profits of the Company, but, if not done, might result in the business suffering from coercive process and unlawful expropriation which will ultimately hamper it’s profit making ability. The said principle was upheld by the Calcutta HC in the matter of Birla Cotton Spinning & Weaving vs. Commissioner of Income-tax(1967 64 ITR 568 Cal) wherein it was held ‘Business expediency may not require that all expenses be incurred for earning immediate profits. Such expediency may not require that all expenses be incurred for earning immediate profits. Such expediency may also require that expenses be incurred to save business from coercive process and unlawful expropriation so that the business may remain on sound footing and may earn better profits in future.’
(vi) The applicant wishes to rely on the judgement of Hon’ble CESTAT in the matter of Essel Propack vs. Commissioner of CGST, Bhiwandi [2018(362) ELT 833 (Tri-Mum)] wherein it was held that CSR is mandatory and essential for smooth business operations of a Company. The relevant text of the judgement is reproduced as hereunder:
“Therefore, sustainability is dependent on CSR without which companies cannot operate smoothly for a long period as they are dependent on various stake holders to conduct business in an economically, socially and environmentally sustainable manner i.e. transparent and ethical. Hence in my considered view, CSR which was a mandatory requirement for the public sector undertakings, has been made obligatory also for the private sector and unless the same is to be treated as input service in respect of activities relating to business, production and sustainability of the company itself would be at stake. “
(vii) Similar judgement was passed by the Hon’ble Karnataka HC in the matter of Commr. Of CEX, Bangalore, vs. Millipore India pvt.ltd. 2012[26]STR.514(Kar.) it was held that the CSR expenses being a statutory obligation are connected with the business since its cost form part of the finished goods being manufactured by a business. The relevant text of the judgement is reproduced as under:
“That apart, now the concept of corporate social responsibility is also relevant. It is to discharge a statutory obligation, when the employer spends money to maintain their factory premises in an eco-friendly manner, certainly, the tax paid on such services would form part of the costs of the final products. In those circumstances, the Tribunal was right in holding that the service tax paid in all these cases would fall within the input services and the assessee is entitled to the benefit thereof. “
(viii) In view of the above submissions on merits and judicial pronouncements, it is submitted that CSR expenses, being mandatory in nature, are incurred in the course and furtherance of business by the applicant and therefore the ITC pertaining to the said expenses must be allowed as eligible ITC under Section 16 of the CGST Act.
4. The applicant further submits that once it is established that incurring the CSR expenditure is in the course and furtherance of business, the ITC of the categories of inputs and input services being procured by the applicant to undertake CSR activities is eligible ITC and does not suffer from any infirmities as envisaged under Section 17(5) of the CGST Act which is summarized below:
