Authority for Advance Rulings, Telangana (‘AAR’) in the case of M/s Bambino Pasta Food Industries Private Limited ‘the applicant’ has issued a ruling regarding availability of Input Tax Credit on CSR expenses incurred by the applicant company. Captioned ruling has been analyzed in this update.
1. FACTS OF THE CASE (relevant extracts)
2. QUESTIONS BEFORE THE AAR
3. CONTENTION OF THE APPLICANT (relevant extracts)
4. RELEVANT LEGAL PROVISIONS REFERRED
Section 17(5)(h) of CGST Act, 2017
5. OBSERVATION AND RULING BY THE AAR
AAR noted that under the Companies Act, 2013, the Companies with a specified net worth or net profit are obliged to incur a minimum of 2 % of their net profit towards their corporate social responsibility (CSR) and failure to do so will attract penalty under sub section 7 of Section 135 of the said Act which may go upto a maximum of Rs.1 Cr.,. Thus, the running of the business of a company will be substantially impaired if they do not incur the said expenditure. Therefore, the expenditure made towards corporate responsibility under section 135 of the Companies Act, 2013, is an expenditure made in the furtherance of the business.
AAR finally ruled as under on the stated questions:
The expenditure made towards corporate responsibility under section 135 of the Companies Act, 2013, is an expenditure made in the furtherance of the business. Hence the tax paid on purchases made to meet the obligations under corporate social responsibility will be eligible for input tax credit under CGST and SGST Acts.
6. Our comments
AAR has dealt with the legal provisions in depth and provided a reasoned order conforming to general understanding & earlier UP AAR ruling in ‘M/s Dwarikesh Sugar Industries Limited’ that ITC benefit on CSR expenditure would be available as the CSR activities are mandatory for specified companies under a statute which makes it integral and sine qua non for continued business operations.
Since CSR activity is mandated by Section 135 of the Companies Act, 2013 for some classes of companies and not voluntary, therefore CSR activity would not be regarded as gift. Clear difference needs to be carved out between goods given as gift and those supplied as part of CSR activities. While the former is voluntary and occasional, the latter is obligatory and regular. Thus, any activity which is mandatory for a business entity to ensure continuity of business operations in view of law of the land has to be treated as incurred ‘in the course of business’ and thus input tax credit of GST paid on the same would be available.
This ruling would enable companies to consider taking ITC on various Covid relief expenses incurred which are being claimed as CSR expenditure in accordance with the FAQs issued by Ministry of Corporate Affairs through General Circular No.15/2020 dated 10th April 2020.
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