Advance Ruling on ITC available on CSR expenses
Since the inception of GST law, this question has been raised on various occasions whether CSR expenses which are mandatory in nature to be considered as incurred in the course of business or not. Accordingly, ITC availability of CSR expenses has always raised a question mark in the minds of businesses.
The same question has been recently raised by M/s Dwarikesh Sugar Industries Limited with the Advance Ruling Authority of Uttar Pradesh and wherein the Hon’ble AAR, Uttar Pradesh vide Order No. 52, dated January 22, 2020, held that expenses incurred towards Corporate Social Responsibility (“CSR”) by the Company in order to comply with requirements under the Companies Act, 2013 (“Companies Act”) qualify as being incurred in the course of business and therefore, eligible for Input Tax Credit (“ITC”) in terms of Section 16 of the Central Goods and Services Tax Act, 2017 (“CGST Act”).
Facts of the case: M/s. Dwarikesh Sugar Industries Limited, (“the Applicant”) is a company engaged in the business of manufacture and sale of sugar and allied products. The Applicant undertakes certain activities in order to comply with the CSR norms in terms of Section 135 of the Companies Act and procures various goods and services on which GST is charged by the supplier.
Issues raised:
- Whether expenses incurred by the Company in order to comply with requirements of CSR norms under the Companies Act, qualify as being incurred in the course of business and eligible for ITC in terms of Section 16 of the CGST Act?
- Whether ITC on free supply of goods as a part of CSR activities is restricted under Section 17(5)(h) of CGST Act?
- Whether goods and services used for construction of school building which is not capitalized in the books of accounts is restricted under Section 17(5)(c) / Section 17(5)(d) of CGST Act?
Held that:
The Hon’ble AAR, Uttar Pradesh held as under:
- After analyzing the provision of Section 135 of the Companies Act and observed that any Company who meets the criteria for CSR is mandatorily required to incur in CSR activities to be in compliance with the Companies Act, and non-compliance of these provisions may lead to business disruptions. Further observed that the term “Gift’ has not been defined under the CGST Act, however, in common parlance, the gift is provided to someone occasionally, without consideration and which is voluntary in nature.
- Agreed that a clear distinction needs to be drawn between goods given as ‘gifts’ 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 expenses incurred by the Applicant have been mandated under the Companies Act.
- Noted 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 CSR activities are to be treated as incurred “in the course of business”.
- Held that, since CSR expenses are not incurred voluntarily, accordingly, they do not qualify as ‘gifts’ and therefore, its credit is not restricted under Section 17(5) of the CGST Act.
- Further held that Section 17(5)(c) and Section 17(5)(d) of the CGST Act, has specifically restricted the ITC on construction/work contract service to the extent of capitalization. Accordingly, the ITC of goods and services used for the construction of school buildings will not be available to the Applicant to the extent of capitalization.
Our Comments: In our view, any expenditure incurred in the course or furtherance of business is eligible for ITC provided a nexus can be established between Input and Output and not specifically restricted under Section 17(5) or any other provisions of the Act.
