Input and input services related to CSR activities are not eligible for ITC as per Section 16(1) of the Act : Gujarat AAR

Introduction:

An advanced ruling is a mechanism whereby taxpayers can get answers or clarifications regarding supply of goods and services, directly from tax authorities and the primary objectives for such a mechanism are to reduce litigation, attract FDI due to transparent tax liability, provide certainty with respect to tax liability and disclose ruling in an inexpensive and transparent manner. The Authority for Advanced Ruling (AAR) constituted by the tax authorities interprets tax laws for the taxpayers and it was created to address any issues faced by taxpayers and assist them by providing a decision on the clarification sought. The AAR’s appellate authority is the AAAR (Appellate Authority or National Appellate Authority for Advanced Ruling). Section 95 to Section 106 in Chapter XVII of CGST Act covers the procedures and rules related to advance rulings. An application is made by the taxpayer on the clarification sought by them. The taxpayer is provided an opportunity of being heard by the AAR. If there is consensus on resolution on the clarification sought between the AAR and taxpayer, an ‘Advance Ruling’ is issued by the AAR and on the contrary, the matter is referred to the AAAR.

The question of law which is address through this AAR is as follows:

• Whether private companies undertaking CSR activities can avail ITC on their CSR procurements and whether CSR activities would amount to activities considered as activities involved in the course of furtherance of business.
• Whether the CSR activities listed by the private company can be considered for ITC eligibility on a case to case basis.

Facts of the application made to AAR, by taxpayer ‘M/S.Adama India Private Limited. (applicant)’, dated 27-Jul-2021:

The applicant, M/S. Adama India Private Limited is in the supply of fungicides, insecticides and herbicides. Pursuant to section 135 of the Companies Act 2013, the applicant is involved in CSR activities and provides food kits, installation of plant and machinery in hospitals and schools, provides donation to relief funds owned by governments and educational institutions etc. The suppliers who provide CSR related goods to the applicant, charge GST on their supply. The applicant therefore wishes to clarify if such CSR procurements made by the company are eligible for ITC as per section 16 and 17(5) of CGST act and if CSR activities can be construed as activities in the course of and furtherance of business. The first eligibility condition for availing ITC is that the input and input services are used in the ‘course and furtherance of business’.

As per section 2(17) of the CGST Act which defines business, any ancillary activity or activity done in connection with the core business activity is also covered under the definition of business. The applicant further submitted that in case of non-compliance of the CSR provisions, the general image of the company gets tarnished and will in-turn reduce its profits. The applicant held that aforementioned concept was upheld in the case of Birla Cotton Spinning and Weaving vs. Commissioner of income-tax where it was stated that all business expenses need not be incurred for making profits and expense can also be incurred to save business from unlawful expropriation and coercive process, for making better profits in the future. Several judgments were cited by the applicant that CSR activities do form part of business expenses, as in CESTAT ruling in Essel Propack Vs. Commissioner of CGST, Bhiwandi, Karnataka High Court ruling the case of Commissioner of CEX, Bangalore Vs. Millipore India Pvt. Ltd. etc.

The applicant further submitted that since CSR expenditures are considered as ‘in the course and furtherance of business’, the expenses they incurred under various heads as follows will not be disqualified for availing ITC under Section 17(5).The applicant for all the below listed items contends that these are not ‘gifts’ as defined under section 17(5)(h) and quoted several Supreme Court cases and AAR rulings where a clear distinction between gift which is voluntary, and obligation to provide under CSR were demarcated(AAR ruling in case of Dwarikesh Sugar Industries Limited, SC judgement in the case of Ku. Sonia Bhatia vs. State of UP). They further contended that even though the CSR goods are provided without consideration, they are used in the course of and furtherance of business and hence qualify for availing ITC.

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Thus the applicant wishes to clarify on the two question listed above in the initial paragraphs. Further the revenue was of the view that input and input services availed for CSR activities do qualify for ITC as they are in the course of furtherance of business.

Observations and final ruling by AAR vide Order No. GUJ GAAR/R/44/2021 dated 11.Aug.2021:

The AAR, on verification of the representation made by the applicant through the company representatives on 27.Jul.2021, acknowledged the clarification sought by applicant through its application. The representatives further presented their case as above.

The AAR quoted Rule 4(1) of the Companies CSR Policy Rules 2014 which reads as follows;

“4(1)The CSR activities shall be undertaken by the company, as per its stated CSR policy, as projects or programs or activities(either new or ongoing), excluding activities undertaken in pursuance of its normal course of business.”

The AAR also quoted Rule 2(d) of the Companies CSR Policy Amendment Rules, 2021 which reads as below;

“2(d)CSR means the activities undertaken by the company in pursuance of its statutory obligation laid down in Section 135 of the Act in accordance with the provisions contained in these rules, but shall not include the following;

(i) activities undertaken in pursuance of normal course of business of the company.

On account of Rule 4(1) prior to 23.Jan.2021 and Rule 2(d) after 23.Jan.2021, the AAR opined that CSR activities are not undertaken in the course of furtherance of business. Further the AAR opined that since the CSR activities are not performed in the normal course of business, pursuant to Section 16(1), they do not qualify for availing ITC.

On the several judgments cited by the applicant, the AAR clarified that in the case of CESTAT ruling in Essel Propack Vs. Commissioner of CGST, Bhiwandi, Karnataka High Court ruling the case of Commissioner of CEX, Bangalore Vs. Millipore India Pvt. Ltd., these cases relate to pre-GST era and not related to GST. For the Birla Cotton Spinning and Weaving vs. Commissioner of income-tax, the AAR concluded that it related to income tax and finally on the AAR ruling, this AAR concluded that ruling by AAR shall be binding on only the applicant who sought the ruling.

The AAR therefore concluded that input and input services related to CSR expenses do not form part of furtherance of business activity and hence are not eligible for ITC as per Section 16(1) of the CGST Act.

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