GST ITC Allowed on Expenses incurred in order to comply with CSR requirements

Expenses incurred in order to comply with requirements of CSR expenses under the Companies Act, 2013 qualify as being incurred in the course of business & eligible for ITC in terms of Sec. 16 of the CGST Act. Thus Input Tax Credit will be allowed on the same. Further even free supply of goods as a part of CSR activities is not restricted under Section 17(5)(h) of CGST Act, 2017.

THE AUTHORITY FOR ADVANCE RULING
UTTAR PRADESH

The Relevant Text of the Hearing as follows :

2) 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 the 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 the provision of goods/services to Registered Charitable Trusts / NGO’s

In order to undertake the above-mentioned CSR activities, the applicant procures various goods and services on which GST is charged by the supplier.

………

4). The applicant further submitted that :-

i. “In the course of business” includes all activities which are incidental /ancillary to the business which are incurred during the course of business. Any activity which needs to be incurred as a part of some process in a business is to be treated as “in the course of business”. A Company is compulsorily required to undertake CSR activities in order to run its business. As a result, they become an essential part of the business process as a whole and thus are treated to be incurred “in the course of business”.

ii. Considering the wide definition of the term ‘business’, there is no requirement to establish a direct one to one linkage in order to avail ITC. Even incidental / ancillary activities are treated as ‘in the course of business’ and procurements made for undertaking such activities are eligible for ITC.

iii. CSR activities undertaken by them to comply with the requirements of Companies Act, 2013 are incurred in the course of business. Since these activities are incurred in the course of business, they are eligible for ITC in terms of the provisions of CGST Act, 2017.

iv. CSR expenses are incurred for the purpose of business / in the course of business however its actual benefits are reaped by the intended recipients and not by the Company (for its own personal use). Since the benefits are rendered to the society and not the Company, restrictions under Section 17 (5) does not apply.

v. 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, it is hereby submitted that these expenses do not qualify as ‘gifts’ and therefore its credit is not restricted under Section 17(5).

vi. Since CSR credit is not restricted under Section 1 7 (5) of CGST Act, 2017, the same is eligible for ITC.

5). The application for advance ruling was forwarded to the Jurisdictional GST Officer to offer his comments/views/verification report in the matter, which was received m this office vide letter C. No. V(30)Div-Bij/Misc/60/18-19/10 dated 02.01.2020, wherein it has been reported that on the basis of restrictive provisions –under Section 17(5)(c & d), ITC in respect of inward supplies of goods & Services for construction of school building, furniture and electrical fittings for school building, is not available to the applicant irrespective of activities being carried out for corporate social responsibilities.

6). The applicant was granted a personal hearing on 21.01.2020. Shri Manoj Agarwal, Chief Manager (Taxation) and Sh. K. Sivarajan, Chartered Accountant, Authorized representatives of the applicant, appeared for hearing on the given date.

During the personal hearing, they reiterated the submissions already made vide their advance ruling application dated 24th September and submitted details of some case laws in the matter.

SOME DISCUSSION AND FINDING :

7). At the outset, we would like to make it clear that the provisions of both the CGST Act and the UPGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the UPGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act /UPGST Act would be mentioned as being under the ‘CGST Act’ 2017.

8). We have gone through the submissions made by the applicant and have examined the explanation submitted by them. At the outset, we find that the issue raised in the application is squarely covered under Section 97(2)(d) of the CGST Act 2017 being a matter related to the admissibility of an input tax credit of tax paid or deemed to have been paid. We, therefore, admit the application for consideration on merits.

9). We have gone through the submissions made by the applicant and have examined the explanation submitted by them. Section 16(1) of the CGST Act, 2017 defines the eligibility for taking input tax credit, which is as under:-

“16 (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”

Further, the term “Business”, as defined under Section 2(17) of the CGST Act, 2017, 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 sub­clause (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;
(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;
(e) provision by a club, association, society, or any such body {for a subscription or any other consideration) of the facilities or benefits to ,its members;
(f) admission, for a consideration, of persons to any premises;
(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
(h) services provided by a race club by way of totalisator or a licence to book maker in such club ; and
(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities”.

10). As per Section 135 (1) of Companies Act, 2013, “Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.”

And as per Sub Section (5) of Section 135 of the Companies Act, 2013, “The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two percent of the average net profits of the company made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy”.

Further Sub Section (7) of Section 135 of the Companies Act, 2013, specifies that “If a company contravenes the provisions of sub-section (5) or sub-section (6), the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both”.

Accordingly, we observe that 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, and non-compliance with these provisions may lead to business disruptions.

The Question and Rulings as follows :

Question 1:– Whether expenses incurred by the Company in order to comply with requirements of Corporate Social Responsibility (CSR) under the Companies Act, 2013 (‘CSR Expenses’) qualify as being incurred in the course of business and eligible for input tax credit (‘ITC’) in terms of Section 16 of the Central Goods and Services Tax Act, 2017 (‘CGST Act, 2017’)?

Answer:- Yes.

Question 2:- Whether free supply of goods as a part of CSR activities is restricted under Section 17(5)(h) of CGST Act, 2017?

Answer:- No

Question 3:- Whether goods and services used for the construction of school building which is not capitalized in the books of accounts is restricted under Section 17(5)(c) / 17(5)(d) of CGST Act, 2017?

Answer:- ITC is not available to the extent of capitalization.