Corporate Social Responsibility (CSR) expenses incurred by the Company in order to comply with requirements under the Companies Act qualify as being incurred in the course of business and therefore, eligible for ITC in terms of the Section 16 of the CGST Act.
Facts: The applicant is a company incorporated under the Companies Act, 2013 and engaged in the business of manufacture and sale of sugar and allied products. In order to comply with the Corporate Social Responsibility (CSR) in terms of Section 135 of the Companies Act, the applicant undertakes following activities :
- Construction of school building, additional rooms, laboratories, etc.;
- Free supply of furniture/fittings such as tables, chairs etc., to be used in the school;
- Free supply of electrical goods for use in school; and
- Other expenses such as provision of goods/services to Registered Charitable Trusts/NGO’s
In order to undertake the abovementioned CSR activities, the applicant procures various goods and services on which GST is
charged by the supplier.
Issue:
- Whether expenses incurred by the Company in order to comply with requirements of Corporate Social Responsibility (CSR) under the Companies Act, 2013 qualify as being incurred in the course of business and eligible for Input Tax Credit (‘ITC’) in terms of the Section 16 of the Central Goods and Services Tax Act, 2017?
- Whether ITC in relation to CSR activities which have been obligated under a law are restricted under Section 17 (5) of CGST Act, 2017?
(a) Whether free supply of goods as a part of CSR activities is restricted under Section 17(5)(h) of CGST Act, 2017?
(b) Whether goods and services used for construction of school building which is not capitalized in the books of account is restricted under Section 17(5)(c)/17(5)(d) of CGST Act, 2017?
AAR Observations: The Authority of Advance Rulings, observe 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”.
Further, regarding the question whether free supply of goods as a part of CSR activities is restricted under Section 17(5) (h) of CGST Act, 2017, the AAR had observed that the applicant supplies of furnitures/fittings such as tables, chairs etc. and electrical goods to be used in the school under the CSR activity, free of cost. In this regard, it is observed that Section 17 of the CGST Act, 2017 talks about apportionment of credit and blocked credits. Further, as per Section 17(5)(h) of the CGST Act, 2017, input tax credit shall not be available in respect of “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.”
The aforesaid section restricted credit of the goods which were written off or disposed of by way of gift or free samples. Now, question is to decide whether the furniture/fittings such as tables, chairs etc. and electrical goods supplied by the applicant are to be treated as gift or not. The term “Gift” has not been defined under the CGST Act, 2017, however in common parlance gift is provided to someone occasionally, without consideration and which is voluntary in nature. Further, the applicant has also relied upon the Judgment of Hon’ble Supreme Court of India, in the case of Ku. Sonia Bhatia v. State of UP, wherein Hon’ble Court has cited the definition of ‘Gift’, in view of such discussion, we are in unison with the applicant that a 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 expenses incurred by the applicant have been mandated under the Companies Act, 2013. It is the applicant’s obligation to incur such expenses in order to be in compliant with the law. Since CSR expenses are not incurred voluntarily, accordingly, we are of the opinion that they do not qualify as ‘gifts’ and therefore its credit is not restricted under Section 17(5) of the CGST Act, 2017.
Further, the AAR in regard as to whether goods and services used for construction of school building which is not capitalized in the books of account is restricted under Section 17(5)(c)/17(5)(d) of CGST Act, 2017, it observed that Section 17(5)(c) and 17(5)(d) of CGST Act, 2017 has restricted the credit on construction/Work Contract services, which is as under :-
(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;
(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;
From above the 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. Accordingly, it was observed that the ITC of goods and services used for construction of school building will not be available to the applicant to the extent of capitalisation.
Held: The Uttar Pradesh AAR that the expenses incurred towards CSR by the Company in order to comply with requirements under the Companies Act qualify as being incurred in the course of business and therefore, eligible for ITC in terms of the Section 16 of the CGST Act.
To read the complete judgment 2020 Taxo.online 1059
