In a recent ruling, the Uttar Pradesh Authority for Advance Ruling (‘AAR’) has ruled that Input Tax Credit (ITC) shall be available on expenses incurred to comply with the requirements of Corporate Social Responsibility (CSR) under Companies Act, 2013 (CSR Expenses). In this article, we have discussed the aforesaid AAR ruling and relevant legal provisions on the subject.
2. Ruling of the Uttar Pradesh AAR
The Applicant, ‘M/s Dwarikesh Sugar Industries Limited’ sought the advance ruling for following transaction:
2.1 Facts on which Ruling was sought
The applicant is a company incorporated under Companies Act, 2013 and engaged in the business of manufacture and sale of sugar & allied products. In order to comply with the Corporate Social Responsibility (CSR) in terms of section 135 of Companies Act, the applicant undertakes following activities:
a) Construction of school building, additional rooms, laboratories etc.;
b) Free supply of furniture / fittings such as tables, chairs etc., to be used in the school;
c) Free supply of electrical goods for use in the school; and
d) Other expenses such as provision of goods/ services to Registered Charitable Trusts/ NGO’s
In order to undertake the above-mentioned CSR activities, the applicant procures various goods and services on which GST is charged by the supplier.
2.2 Question before AAR
a) Whether expenses incurred by the company in order to comply with requirements of Corporate Social Responsibility (CSR) under the Companies Act, 2013 (CSR Expenses) qualify as being incurred in the course of business and eligible for input tax credit (ITC) in terms of the Section 16 of Central Goods & Services Tax Act, 2017 (CGST Act 2017)?
b) Whether ITC in relation to CSR activities which have been obligated under a law are restricted under section 17(5) of CGST Act, 2017? If yes,
i. Whether free supply of goods as a part of CSR activities is restricted under section 17(5)(h) of CGST Act, 2017?
ii. Whether goods and services used for construction of school building which is not capitalised in the books of accounts is restricted under Section 17(5)(c) / 17(5)(d) of CGST Act, 2017?
2.3 Findings by AAR
a) AAR observed that the applicant is compulsorily required to undertake CSR activities in order to run its business and accordingly, it becomes an essential part of his business process as a whole. Therefore the said CSR activities are to be treated as incurred ‘in the course of business’.
b) AAR considered the decision of Hon’ble CESTAT Mumbai in the case of M/s Essel Propack Limited Vs. Commissioner of CGST, Bhiwandi E.L.T. and Hon’ble High Court of Karnataka in the case of Commissioner of Central Excise, Bangalore Vs. Millipore India (P) Ltd. to arrive at the conclusion that CSR activities are an essential part of business process as a whole of assessee and therefore are to be treated as incurred ‘in the course of business’.
c) AAR agreed with the applicant that clear distinction needs to be drawn between goods given as gift and those provided/ supplied as a part of CSR activities. While the former is voluntary and occasional, the later is obligatory and regular in nature. CSR expenditure incurred by the applicant have been mandated under the Companies Act. It is the applicant’s obligation to incur such expenses in order to be in compliance with the law. Since, CSR expenses are not incurred voluntarily, they do not qualify as gifts.
d) AAR observed that Section 17(5)(c) & (d) of the CGST Act, 2017 has specifically restricted the ITC on construction / work contract service to the extent of capitalisation.
a) CSR expenses qualify as being incurred in the course of business and eligible for input tax credit (ITC) in terms of Section 16 of the CGST Act, 2017
b) Section 17(5)(h) would not be applicable on free supply of goods as a part of CSR activities
c) ITC on goods and services used for construction of school building would not be available to the extent of capitalisation.
3. Our Comments
We have provided our Comments in the ensuing paragraphs.
3.1 Legal Provisions under the CGST Act
16 (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
|17(5)(c)||works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;|
|17(5)(d)||goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.|
|Explanation.—For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;|
|17(5)(h)||goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;|
3.2 Other legal provisions
While the term business is defined under CGST Act, the phrase “in course or furtherance of business” is not defined in the law. Dictionary meaning of the term “furtherance” implies advancement, promotion of scheme, etc. Therefore, furtherance of business would imply advancement of business, promotion of business. Any activity carried on with a purpose to achieve business objectives, business continuity and stability would per se amount to an activity in course or furtherance of business.
Similarly, ‘Gift’ is not defined under GST. In common parlance, gift is voluntarily provided to someone occasionally without consideration. As per the same, a gift is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation therefor. It is a gratuity and an act of generosity. There can be no consideration in case of a gift.
The Gift-Tax Act (18 of 1958) had defined the word gift to mean transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money’s worth.
Next question is whether CSR activity would qualify as gift or not? 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.
3.3 Earlier Advance Rulings
Authority for Advance Rulings, Kerala, in the matter of M/s. Polycab wires private limited [2019 (24) G. S. T. L. 103 (A. A. R. – GST)], where the applicant distributed electrical items like, switches, fan, cables etc. to flood affected people under CSR expenses on free basis without collecting any money, has ruled that no ITC would be available for these transactions as per section 17(5)(h) of the KGST and CGST Act, 2017 according to which ITC is not allowed on goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
Hon’ble AAR has not discussed the matter in detail and simply ruled that ITC would not be available on goods distributed free of cost as CSR expenditure without extending any plausible reasoning.
3.4 Impact of UP AAR Ruling on Applicant and Industry
AAR rulings are binding only on the applicant and jurisdictional GST officers. It does not hold binding force and at the most only have a persuasive value. However, Hon’ble AAR has dealt with the legal provisions in depth and provided a reasoned order conforming to general understanding 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. Thus this ruling shall provide much needed clarity on the subject considering earlier adverse ruling by Kerala AAR.
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.
Further the ruling only deals with CSR mandated under Companies Act, 2013 and ITC eligibility in case of CSR activities undertaken voluntarily or beyond the limits prescribed under Companies Act, 2013 still remain an open area. Though according to rationale given by UP AAR, ITC would only be available if the expenditure is mandatory and not voluntary.