No ITC on goods or services or both which are to be used for activities relating to obligations under CSR

Facts of the case:-

In this case, the appellant supplies insecticides, fungicides and herbicides. The Applicant has been spending the mandatory amount on CSR activities in the form of donations to the Government relief funds/educational societies, civil works or installation of plant and machinery items in schools or hospitals, distribution of food kits etc. Further, the vendors that supply goods/services to the Applicant for the purpose of undertaking the CSR activities charge GST on their output supplies.

Issue:-

The Appellant sought advance rulings before the Authority for Advance Rulings (AAR), Gujarat as to whether ITC would be available of the inputs and input services procured for the purpose of undertaking the CSR activities.

Rulings of AAR:-

The Gujarat AAR vide its order no. GUJ/GAAR/R/44/2021 dated 11.08.2021, held that the CSR activities undertaken by the company shall exclude activities undertaken in pursuance of its normal course of business and it does not include activities undertaken in pursuance of normal course of business of the company. Further, a registered person is entitled to take ITC charged on any supply of goods or services or both, which are used or intended to be used in the course or furtherance of his business. Hence, the CSR activities are not activities undertaken in pursuance of Applicant’s normal course of business and Section 16(1) of the CGST Act, 2017 bars CSR activities from input/input service and therefore not eligible for ITC.

The Appellant Aggrieved by the ruling of Gujarat, AAR preferred appeal before GAAAR. The Appellant submitted that Gujarat AAR wrongly equated “normal course of business” with “course and furtherance of business” under GST law, leading to an erroneous denial of ITC. Further, CSR activities, being mandatory and contributing to goodwill, inherently promote business and should be considered “in the course and furtherance of business.”

Rulings of AAAR:-

The GAAAR, emphasized on the fact that the ITC on inward supplies shall be available only if outward supplies are taxable. Under CSR activities the company provides outputs/output services free of cost. Since CSR is made free of cost, and not with the motive to earn profit but to fulfill commitments towards the society, environment etc., expenses incurred cannot be treated as in course of or furtherance of business.

As per Section 2(108) of CGST Act, 2017, ‘taxable supply’ means a supply of goods or services or both which is leviable to tax under this Act; It is not the case of the appellant that their supplies under CSR activities are leviable to GST. Thus taking into account the definition of taxable supplies and the provisions of Section 17(2) of CGST Act, 2017, input credit cannot be availed on CSR activities, further as per the provision of Section 37 of the Income Tax Act, 1961, any expenses incurred by an assessee on corporate social responsibility activities as given under Section 135 of the Companies Act, 2013 shall not be considered to be an expense incurred by the assessee for the objectives of the company or profession. Hence when the same does not amount to business expenditure and ITC cannot be claimed on such expenditure.

The GAAAR also referred to the amendments in Section 17 of the CGST Act, introduced through the Finance Act, 2023, effective from October 1, 2023 which clarified the legislative intent to disallow ITC on goods or services used for CSR activities.

Consequently, the GAAAR upheld the AAR, Gujarat ruling that the CSR activities are excluded from the normal course of business of the company, and therefore, they are not eligible for ITC as per Section 16(1) of the CGST Act.

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