The uncertainty on whether corporations can avail input tax credit (ITC) for any expenditure made under Corporate Social Responsibility (CSR) is a longstanding one. In the absence of a clear-cut law, corporations have had to rely on specific AAR rulings to ascertain whether they can avail ITC for their CSR expenditure. However, inconsistent findings by several AARs has rather convoluted this issue as a result of differing treatment being meted for similar kind of transactions.
On the one hand, AAR rulings have held that ITC can be claimed on CSR expenditure as it is made in the course or furtherance of business. On the other hand, it has been stated that corporations cannot get ITC for CSR expenditure for two reasons: (a) it is not made in the course or furtherance of business, and (b) CSR comes under the list of exceptions from ITC as it is a ‘gift’.
A very recent ruling of the Gujarat AAR (“GAAR”) dated 11.08.2021 has added an extra limb of argument to come to a conclusion that ITC is not available to corporations for making CSR expenditures. The GAAR relied on the provisions of the Companies (CSR Policy) Rules, 2014, and stated that CSR activities are those activities that has been excluded from the normal course of business and hence ITC is unavailable under Section 16(1) of the Central Goods and Services Tax Act, 2017 (“CGST Act”). The author seeks to argue that while the reasoning put forth by the GAAR is novel, it is the wrong approach and only adds to the existing uncertainty.
Relevant Legal Provisions on CSR and ITC
The Companies Act, 2013 under Section 135 mandates every company to spend at least 2% of its net profit towards CSR. Tax provisions get attracted to this mandatory statutory obligation, as companies generally incur expenses for procurement of goods or services for distribution. Relevant tax implications can be found under the CGST Act.
The ability to avail tax credits for corporate tax payers under the GST regime is one of the major advantage of this new indirect tax overhaul in India. Unlike erstwhile regimes like CEVNAT where credit was available only when goods or services came under the definition of inputs, input services or capital goods, input tax credit available under GST is very wide. Section 16(1) of the CSGT Act states that every registered person can avail input tax credit for any inward supply of goods or services or both, if it is made in the “course or furtherance of business”. A negative list can be found under Section 17(5) of the Act which lists certain supplies where input tax credit is not available.
Upon perusal of the relevant provisions of the CGST Act, applicants must fulfil a twofold test to avail ICT. First, the supply should be made in the “course or furtherance of business”; second, the supply should not be one covered in the negative list under Section17(5). Thus, a major question that arises now is whether, using this twofold test, ICT is available to corporations that have incurred expenses in meeting a mandatory CSR obligation.
GAAR Ruling in M/s. Adama India Pvt. Ltd.
The applicant had incurred expenditure on CSR activities in the form of donations to Government Relief funds/educational societies, installation of plant and machinery in schools or hospitals etc. GST charges were paid by the applicant to vendors that supplied the required goods or services for distribution. Among other things, the applicant argued that the CSR activities are in the course of business and will be counted as eligible ITC in terms of Sections 16 and 17(5) of the CGST Act. The applicant stated that although CSR does 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 will ultimately hamper its profit making ability. Hence, CSR is an activity that is incidental to its business and is done in furtherance of business.
The GAAR rejected the submissions of the applicant and held that CSR is not done in course or furtherance of business. The GAAR cited Rule 4(1) of the Companies (CSR Policy) rules, 2014, to state that CSR activities are not activities that are “undertaken in pursuance of its normal course of business”. Further, it also relied on the amended definition of CSR under Rule 2(d)(i) vide Amendment Rules 2021 to categorically state that CSR is not an activity that is undertaken in pursuance of normal course of business of the company. As supply in furtherance of business activity is sin qua non to avail ITC, the GAAR did not find it necessary to go into the second test under Section 17(5).
Incorrect approach of the GAAR
From the above ruling, it can be noticed that the GAAR came to its conclusion by adopting a very narrow definition of CSR. The GAAR relied on the definition of CSR under the Companies (CSR Policy) Rules as CSR has not been defined anywhere under the CGST Act. However, while doing so, the GAAR did not take into consideration the context in which each legislation was enacted. It is well settled by the Supreme Court in the case of Kohinoor Elastics (P) Ltd. v/s Commissioner of Central Excise, Indore that the context in which certain words have been used in a particular legislation might not be relevant for the purpose of interpreting it in a completely different legislation.
The context in which the CGST Act was enacted was to move away from the erstwhile multifarious indirect tax regimes to a “one nation tax market”. In doing so, one of the advantages was that a lot of tax credits are now available under the GST which were not available earlier. It is for this reason that the term “course or furtherance of business” has been kept very wide in scope. Further, the intention of legislation under Section 17(5) is also that unless the supply is covered by the exemption categorically listed in it, ITC is available for taxpayers. Similarly, the definition of business under Section 2(17) has been kept wide to include even those activities that are incidental/ancillary activities can be treated as ‘in the course of business’. Going by this interpretation, CSR activity, for tax purposes, can be treated as an incidental business activity.
In addition, there are several case laws that help fulfil the twofold test required for corporations to avail ITC. In Commr. Of CEX, Bangalore v. Millipore India Pvt. Ltd, the Karnataka HC has held that “CSR expenses, being mandatory in nature, are incurred in the course and furtherance of business and therefore the ITC pertaining to the said expenses must be allowed as eligible ITC under Section 16 of the CGST Act.” Reliance can also be placed on the judgment of CESTAT tribunal which held that CSR is mandatory and essential for smoot business operations of a company. Therefore, it can sufficiently be established that CSR falls under the term “course or furtherance of business”.
To fulfil the second element of the twofold test, reference to a recent ruling of the UP AAR in the case of Dwarikesh Sugar Industries Ltd. is particularly useful. In certain circumstances, supply of some goods without any consideration might appear to be gifts and hence ICT may not be eligible under Section 17(5)(h). However, the AAR ruled that there is a clear distinction between gifts and CSR activities. While both might be devoid of any consideration, gift is generally given voluntarily and is occasional while CSR is obligatory and regular in nature. Consequently, as CSR is not hit by the restriction under Section 17(5), the second test is also fulfilled. Therefore, ideally, there should be no issue for corporations to avail ITC on CSR expenditures.
The way forward
The current conundrum amongst AARs in relation to availability of ITC for CSR expenditures is a very problematic. The inconsistent findings from different AARs clearly indicate a need for a national framework to settle the position of law. However, in the interim, it is suggested that AARs should use the approach illustrated above to come to a conclusion that corporations can avail ITC benefits for any CSR expenditure made and apply it uniformly. Inconsistent decisions only serve to increase the cost of tax for corporations and might disincentivise them to spend only a limited sum in CSR. This would not be an ideal situation, especially when large sums of money is being requested by the government as CSR to deal with the Covid-19 pandemic.
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Author Mail: Nirupan Karki | Final Year Student, NALSAR University of Law
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