The Hon’ble Advance Ruling Authority, Telangana vide its order dated 20.10.2022 in the matter of M/s Bambino Pasta Food Industries Private Limited, Hyderabad, Telangana – 500034, held that the expenditure made towards Corporate Social Responsibility under Section 135 of the Companies Act, 2013, is an expenditure made in the furtherance of business.  Hence, the tax paid on the purchases made to meet the obligations under Corporate Social Responsibility will be eligible for Input Tax Credit under CGST and SGST Acts.

The Applicant filed the advance ruling application before the Hon’ble Advance Ruling Authority raising a query that whether ITC is available on CSR (Corporate Social Responsibility) expenses incurred by the company?

Facts of the Case: –

• The applicant Bambino Pasta Food Industries is a manufacturer of Vermicelli and pasta Products. This application has been filed by the Applicant to know the admissibility of ITC on the Corporate Social Responsibility (shortly known as CSR) expenditure spent by it.
• It was informed in the application that during the covid time, when there was shortage of oxygen in the county, the applicant donated oxygen plant to AIIMS Hospital Bibinagar, Yadadri Bhongir District for the benefit of patients who were suffering with low oxygen levels.
• The Applicant for the aforesaid purpose, purchased PSA oxygen plant and spare parts for the oxygen plant for Rs. 62,74,200 which includes IGST paid of Rs 9,16,200. The applicant is of the opinion that the expenditure made by them comes under the CSR provisions as per Section 135 of the Companies Act, 2013.

Applicant’s Interpretation of Law with respect to query raised: –

• It was submitted on the behalf of the Applicant that it is the view of the Applicant that it is eligible to claim ITC on the CSR expenditure incurred since it is spent by the Applicant in accordance with the provisions laid down by, and mandated under Companies Act, 2013.
• It is the obligation of the Company to incur such expenses in order to comply with law. Further CSR activity is to be considered as “used or intended to be used in the course or furtherance of business” because any Company, which meets the criteria for CSR, is mandatorily required to incur in CSR activities to be in compliant with the Companies Act, 2013.  Accordingly, the Applicant was compulsorily required to take CSR activities in order to run its business.  Thus, it becomes an essential part of its business process as a whole.
• That in terms of 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.” So, this provision restricted credit of the goods which were written off or disposed by way of gift or free samples. Further 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.
• Reliance was placed on the judgment of Hon’ble Supreme Court of India in matter of Sonia Bhatia v. State of UP, wherein Hon’ble Court has cited the definition of ‘gift’ from Corpus Juris Secundum, Volume 38 in the following words: “A ‘gift’ is commonly defined as a voluntary transfer of property by one to another, without any consideration or compensation there for.” It has been described by the Hon’ble Court that the ‘gift’ is gratuity and an act of generosity and stress has been laid on the fact that if there is any consideration then the transaction ceases to be a gift.”
• That in view of the above, it was submitted that a clear distinction has to be made between the goods given as ‘gift’ and supplied as part of CSR activities as required under law. That while the former is voluntary and occasional the latter is obligatory and regular in nature.
• Further it was submitted that the CSR expenses are mandate under the Companies Act, 2013 and it is the obligation of the Applicant to incur such expenses to comply with the law. Since CSR expenses are not incurred voluntarily, accordingly, applicant is of the opinion that it doesn’t qualify as ‘gift’ and therefore its credit is not restricted under Section 17 (5) of the CGST Act, 2017.
• Reference was made to the judgment of Hon’ble CESTAT, Mumbai in the matter of M/s Essel Propack Ltd. Vs. Commissioner of CGST, Bhiwandi {2018(362) E.L.T. 833 (Tri.-Mumbai), wherein it was held that ‘Sustainability is dependent on CSR without which companies cannot operate smoothly for a long period as they are dependent on various stake holders to conduct business in an economically, socially and environmentally sustainable manner i.e. transparent and ethical. Hence in my considered view, CSR which was a mandatory requirement for the public sector undertakings, has been made obligatory also for the private sector and unless the same is to be treated as input service in respect of activities relating to business, production and sustainability of the company itself would be at stake’.
• That the use of words ‘in connection with’ or ‘incidental’ in the definition of business is to expand the scope of definition so as to include such activities which though might not have a direct bearing on the profits of the Company, but, if not done, might result in the business suffering from coercive process and unlawful appropriation which will ultimately hamper its profit-making ability.
• Further reliance was placed on the decision of Calcutta High Court in Birla Cotton Spinning & Weaving vs. Commissioner of Income-tax (1967 64 ITR 568 Cal), wherein it was held that ‘Business expediency may not require that all expenses be incurred for earning immediate profits. Such expediency may not require that all expenses be incurred for earning immediate profits. Such expediency may also require that expenses be incurred to save business from coercive process and unlawful expropriation so that the business may remain on sound footing and may earn better profits in future.’
• That Section 135(7) of the Companies Act, 2013, specifies that the company or business may incur a penalty of twice the unspent amount required to be transferred to any fund included in Schedule VII of the Act or unspent CSR Account, as the case may be, or one crore rupees, whichever is less and every officer in default must pay a penalty of 1/10th of the unspent amount required to be transferred to any fund included in Schedule VII of the Act or unspent CSR Account, or two lakhs rupees, whichever is less. Therefore, it is clear that the company has not other option except to incur such CSR amount or transfer such amount to funds specified by Government.  Non spending of CSR funds will definitely have an impact on the functioning of company as penal provisions will have financial impact as well as on how the brand is perceived by the customers.
• Further the said expenditure on CSR is incurred under statutory compulsion, thus, cannot be considered as ‘gift’ for any reason.
• Reliance was placed on the advance ruling in case of Dwarikesh Sugar Industries Limited, Uttar Pradesh AAR, wherein it was held that ‘CSR is a mandatory obligation on a company. So, the expenses incurred by any company in this regard can be considered as incurred in course of furtherance of business. It is mandatory for company to fulfill this obligation to continue its business. AAR also stated that as it is a mandatory obligation and it cannot be considered as gift. So, ITC cannot be said to be blocked.’

Held: –

• The Hon’ble Advance ruling authority after considering the submissions made the applicant, observed that the submission made by the applicant is that it purchased an oxygen plant for Rs.62,74,200/- and had given it to AIIMS Hospital has part of their corporate responsibility under section 135 of the companies Act, 2013. Further the purchase/purchases made were in furtherance of their business and hence tax on such purchases is eligible for input tax credit under Section 16(1) of the CGST Act.
• Thereafter, the Hon’ble Authority taking note of the law stated in Section 135 Sub section (1), (5), (6) & (7) of the Companies Act, 2013, found that from the perusal of the aforesaid statutory provisions, the Companies with a specified net worth or net profit are obliged to incur a minimum of 2 % of their net profit towards their corporate social responsibility and failure to do so will attract penalty under sub section 7 of sec.135 of the said Act which may go up to a maximum of Rs.1 Cr. 

The Hon’ble Advance Ruling Authority with the above findings, held that the expenditure made towards corporate responsibility under Section 135 of the Companies Act, 2013, is an expenditure made in the furtherance of the business. Hence the tax paid on purchases made to meet the obligations under corporate social responsibility will be eligible for input tax credit under CGST and SGST Acts.