ITC is not eligible on expense incurred on CSR Activities

ITC is not eligible on expense incurred on CSR Activities

Held by Authority of Advance Ruling, Gujarat in the matter of 

M/S. ADAMA INDIA PRIVATE LIMITED (Advance Ruling No No.- GUJ/GAAR/R/44/2021, dated Dated.- August 11, 2021)

In the given matter the M/s Adama India Pvt. Ltd (the applicant) has procured various goods and services for CSR Activities. Supplier of such goods and services have charged GST on such goods and services. The applicant submitted that ITC on CSR activities shall be permitted only if the same is considered as incurred in “Course and Furtherance of business” under Section 16 of CGST Act. The applicant sought advance ruling that whether ITC is admissible on inputs and input services procured as a part of CSR Activities.

Hon’ble GAAR Authority referred to the definition of “Corporate Social Responsibility” given in Rule 4(1) of CSR Rules. As per definition, CSR does not include activities undertaken in pursuance of normal course of business of the company. Therefore, as per combined reading of definition given under CSR rules and Section 16(1) of CGST Act, expense incurred on CSR activity can’t be referred as incurred in course and furtherance of business.

Therefore, hon’ble AAR held that ITC is not admissible on expenses incurred on CSR activities.

1. Brief facts of the case

  1. M/s Adama India Pvt. Ltd. (The Applicant), engaged in a business where it supplies insecticides, fungicides and herbicides.
  2. As per mandatory requirement under Companies Act, the applicant participates in the Corporate Social Responsibilities (CSR) Activities. For this purpose, the applicant spends mandatory amount on various CSR Activities such as civil works or installation of Plant & Machinery, distribution of foods in school/hospitals, etc.
  3. The vendors of products and services used in CSR Activities charge the GST on these goods or services.
  4. The applicant is intending to avail the Input Tax Credit on goods or services used in CSR Activities.
  5. For this purpose, the applicant seeks to know whether the CSR Activities are carried out in the course of furtherance of business and therefore, whether the applicant is entitled to claim ITC on such activities in accordance with Section 16 and Section 17(5) of CGST Act, 2017.
  6. The Applicant has incurred various expenses. Following are certain illustration of expenses incurred on CSR Activities:
    • Provided Notebooks/course material for schools;
    • Construction of cement bench at public places, public urinals, school auditoriums;
    • Procurement and installation of oxygen generating plant at hospitals, water filter plants, solar water heaters ;
    • Masks Sanitizers, Oxygen concentrator;
    • Chairs and tables in schools and hospitals;

2. Relevant Legal Extracts

Legal extract of relevant sections is reiterated below for ready reference:

  1. Section 2(17)-“Business” 

Word “Business” is defined under Section 2(17) of the CGST Act, which is reiterated below:

““Business” includes:

(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;”

  1. Section 16: Eligibility and conditions for taking input tax credit

“(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.”

  1. Section 17: Apportionment of credit and blocked credits

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

….

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and”

3. Submission of the Appellant 

The applicant made following submissions before Hon’ble AAR:

  1. The applicant submitted that ITC can be availed by a person registered subject to fulfilment of criteria mentioned in section 16 of the CGST Act. 
  2. Among other things, as per Section 16, the main criterion to avail ITC on input and input service is that the same must have been used for “course and furtherance of business”. Although, the phrase “Course and Furtherance of Business” is not defined anywhere in GST law.
  3. Therefore, the applicant shall be entitled to claim ITC on CSR Activities only if such activity can be considered as incurred in course and furtherance of business.
  4. The appellant further submitted that as per definition of “business”, any activity done in connection with the main business operation of the company shall be considered as “Business”.
  5. In the given case, CSR Activities are a mandatory obligation of the applicant as per Companies act and not performing the same may lead to portray a bad image of the company. 
  6. Further, expressions ‘in connection with’ or ‘incidental’ used in the definition of “business” are used to expand the scope of the term. The purpose is to include those activities which may not directly lead to profit making but if it is not done may lead to legal action against the business and ultimately can hamper profit making ability of the business.
  7. Same principle was also established by Calcutta HC in matter of Birla Cotton Spinning & Weaving vs. Commissioner of Income-tax (1967 64 ITR 568 Cal).
  8. The Appellant also relied on the following judgements wherein it was held that CSR is mandatory and essential for smooth running of a company. Therefore, CSR Expenses, which are mandatory in nature, are incurred in course and furtherance of business and therefore, related ITC must be allowed under Section 16 of CGST Act.
    • Essel Propack vs. Commissioner of CGST, Bhiwandi [2018 (362) ELT 833 (Tri-Mum)]
    • Commr. Of CEX, Bangalore, vs. Millipore India pvt.ltd. 2012 [26] STR.514 (Kar.) 
  9. The Appellant also submits that once it is established that CSR activities are performed in course and furtherance of business then all CSR activities incurred by the applicant are eligible for ITC and it does not suffer any infirmities under section 17(5) of CGST Act which is summarised below:
S.No.  Category of inputs/input servicesExpense items (illustrative)Applicant’s submission
1.Books & StationeryProviding Notebooks/ course materials for schoolsITC on the Books & Stationery items is not blocked under section 17(5). However, providing the same without any consideration may be considered as “gifts’ and therefore, ITC may be disallowed under section 17(5)(h). Further, UP AAR in the matter of Ku.Sonia Bhatia v. State of UP held that Goods given as gifts are voluntary in nature whereas the goods given in CSR are mandatory in nature. Hence, the books & Stationery given in CSR should not be considered as gifts and therefore the ITC pertaining to those items is not not barred u/s 17(5)(h) and should be allowed for ITC.
2. All kinds of civil works, whether or not including plant and machinery itemsConstruction of cement bench at public places, public urinals, school auditoriumsSection 17(5)(c) restricts the ITC of works contract service when it is done for the purpose of construction of immovable property.However, as per the definition of “Construction” given in explanation to Section 17(5)(d), any cost incurred on construction is excluded where the cost is not capitalised in the books.Since, in the given case, the construction cost is not capitalised in books of accounts of the applicant and therefore ITC must be allowed.
3. All plant and machinery itemsProcurement and installation of oxygen generating plant at hospitals, water filter plants, solar water heatersITC on plant and machinery items are not barred anywhere in Section 17 of CGST Act. Therefore, in the present case, ITC pertaining to procurement and installation shall be eligible.
4.Medical equipment and accessoriesMasks Sanitizers, Oxygen concentratorITC on medical equipment and accessories are not blocked under section 17(5) until it is of the nature of gifts.Expenses incurred on CSR activities is not covered under the category of “gifts” as held by UP AAR in the matter of Ku.Sonia Bhatia v. State of UP.Therefore, ITC pertaining to this item is eligible.
5. FurnitureChairs and tables in schools and hospitalsITC on furniture is not blocked under section 17(5) and the same is also not considered as gift, as contended in above points. Therefore, ITC should be allowed.
  1. Therefore, the applicant concluded that it is eligible to avail ITC on all above mentioned expenses incurred on CSR activities. 
  2. The applicant also submitted that the CBIC has also clarified the meaning of gift on the same lines vide press release dated 10th July, 2017. As per clarification, a gift is something which is given without any consideration and completely voluntary. However, goods provided without any consideration under CSR Activity can’t be termed as voluntary in nature as the same under statutory obligation.

4. Questions before Hon’ble AAR

The applicant has asked for ruling on following questions:

  1. Whether the inputs and input services procured by the applicant, in order to undertake the mandatory CSR activities as required under the Companies Act, 2013, qualify as being in the course and furtherance of business and therefore will be counted as eligible ITC in terms of Section 16 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’)? 
  1. Also, if the answer to the above question is in the affirmative, whether the categories of the above mentioned inputs and input services being procured by the applicant for the purpose of undertaking CSR activities will constitute as eligible ITC in terms of section 17(5) of the CGST Act.”

5. Revenue’s Submission 

The revenue contended that a Company is mandatorily required to incur expense on CSR Activity for furtherance of business. Therefore, ITC is eligible for the same.

6. Findings of the case by GAAR

The AAR made following findings:

  1. Reference is made to rule 4(1) of the companies (CSR Policy) Rules, 2014 which reads as follows:

“4.(1) The CSR activities shall be undertaken by the company, as per its stated CSR policy, as projects or programs or activities(either new or ongoing), excluding activities undertaken in pursuance of it’s normal course of business.”

  1. Therefore, as per Rule 4(1) above, the CSR activities undertaken by the company shall exclude activities undertaken in pursuance of it’s normal course of business. Further, as per Rule 2(d) also, “Corporate Social Responsibility” does not include activities undertaken in pursuance of normal course of business of the company.
  2. Section 16(1) of CGST Act, ITC can be claimed by a registered person on the GST of goods or services or both which is used or intended to be used in the course of furtherance of business. Hence, the section 16(1) of the CGST Act bars the CSR activities from input/input service.
  3. As per combined reading of Companies CSR Rules and Section 16(1) of CGST Act, the AAR disagreed with the contention of both the parties. Further, as per Section 16(1), ITC is barred on CSR activities and therefore there is no point to discuss the item of the CSR or any details of it.

7. Ruling of Authority of Advance Ruling, Gujarat 

CSR activities, as per Companies (CSR Policy) Rules, 2014 are those activities excluded from normal course of business of the applicant and therefore not eligible for ITC, as per Section 16(1) of the CGST Act.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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