GST UPDATE No 330 ON ADMISSIBILITY OF ITC ON CSR ACTIVITIES

The admissibility of input tax credit on corporate social responsibility (CSR) activities has been a point of dispute since erstwhile indirect tax regime. The revenue authorities are reluctant to allow input tax credit on such activities undertaken by the business on the grounds that they are not in relation to their business activities but are rather social activities undertaken by the corporates. However, it is not hidden that the corporates have legal obligation to undertake CSR activities so it very vital for their survival and smooth business operations. Recently, this issue was raised before Telangana State AAR in the case of M/S BAMBINO PASTA FOOD INDUSTRIES PRIVATE LIMITED [TSAAR Order no. 52/2022 dated 20.10.2022]. The outcome of the decision is the subject matter of discussion of our present update.
The applicant is a manufacturer of Vermicelli and pasta Products. The Applicant filed application to know the admissibility of ITC on the CSR expenditure incurred by it. During the covid time, when oxygen was scarce in the country, applicant has donated oxygen plant to AIIMS hospital Bibinagar, for the benefit of patients who were suffering with low oxygen levels. For this purpose, the applicant has purchased PSA oxygen plant and spare parts for that 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 incurred by them comes under the CSR provisions as per Section 135 of the Companies Act, 2013.The applicant contended that it is the Company's obligation to incur such expenses in order to be in compliant with the law. 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. That the applicant Company is compulsorily required to undertake CSR activities in order to run its business and accordingly, it becomes an essential part of its business process as a whole. The applicant pleaded that the ITC is not restricted under section 17(5)(h) of the CGST Act, 2017, because the goods given under CSR activities cannot be treated as gifts. Although, the term gift has not been defined in the CGST Act, 2017, in common parlance, it means anything given to someone occasionally without consideration which is voluntary in nature. Reliance was also placed on the Supreme Court decision given in the case of Ku. Sonia Bhatia Vs State of UP (1981-VIL-06-SC) for meaning of gift. It was contended that since CSR expenses are not incurred voluntarily but are obligatory in nature, 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. Reliance was also placed on the decision given by the CESTAT in the case of M/S ESSEL PROPACK LTD. VS. COMMISSIONER OF CGST, BHIWANDI {2018(362) E.L.T. 833 (TRI.-MUMBAI)].

The applicant also referred to the advance ruling in the case of DWARIKESH SUGAR INDUSTRIES LIMITED[2021 (53) G.S.T.L. 482 (A.A.R.- GST-U.P.)], Uttar Pradesh AAR gave a ruling 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 fulfil 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.The AAR after examining the submissions of the applicant placed reliance on the provisions contained in section 135 of the Companies Act, 2013. From the statutory provisions of the Companies Act, 2013, 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 upto a maximum of Rs.1 Cr. Thus, the running of the business of a company will be substantially impaired if the applicant do not incur the said expenditure. Therefore, 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.

The above decision is another favourable decision on eligibility of ITC on CSR activities. However, the point that needs to be answered is whether all transactions/activities undertaken as a part of CSR would qualify for ITC or the admissibility of ITC would be subject to restrictions contained in section 17(5) of the CGST Act, 2017. It is worth noting that in the case of DWARIKESH SUGAR INDUSTRIES LIMITED [2021 (53) G.S.T.L. 482 (A.A.R.- GST-U.P.)], the applicant had undertaken construction of school under CSR for which ITC availability was enquired. The AAR held that ITC is not available to the extent of capitalisation. Now, this indicates that if the expenditure is expensed of and considered as revenue, ITC of construction of school building would be available to the applicant as it is under CSR. However, such an interpretation may not be acceptable to the department as merely because the construction is being expensed of in Profit and Loss account, ITC will be available. This decision has far reaching implications as it indicates that even the prohibition contained in section 17(5) of the CGST Act, 2017 is to be kept in mind before availing ITC on CSR activities.

However, the issue that needs to be examined is whether input tax credit of oxygen plant installed at AIIMS as a part of CSR as allowed in the above cited case would not get hit by the restriction of 17(5)(b)(i) as health services are not eligible for ITC. In our opinion, the ITC of diagnostic facilities such as X-rays, blood tests etc is restricted but supply of oxygen plant to AIIMS is akin to supply of capital goods to hospital which is not supply of health services and is not restricted under section 17(5)(b)(i) of the CGST Act, 2017. Moreover, the ITC is restricted for the person supplying health services which is AIIMS hospital in the present case. Similarly, if food packets are being distributed as a part of CSR activity, whether the ITC claim would be governed by restriction under section 17(5)(b)(i) of the CGST Act as supply of food and beverages is restricted for ITC availment. In our opinion, the input tax credit would not be allowed even if it is incurred as a part of CSR expenditure as the said supply is restricted for credit availment under section 17(5)(b)(i) of the CGST Act. This is for the reason that the second proviso to section 17(5)(b) providing relaxation for availment of ITC is only applicable where the supply of such goods or services is obligatory for an employer to provide the same to its employees under any law for the time being in force. This exception is not general and is specific to employer employee relationship. Hence, even if the CSR is being undertaken as a part of statutory obligation of company, the ITC availment will be governed by restrictions contained in section 17(5) of the CGST Act. Hence, it is very crucial to adhere to the provisions of section 17(5) before availing ITC of any transaction incurred under CSR expenditure.

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GST UPDATE No 330 ON ADMISSIBILITY OF ITC ON CSR ACTIVITIES

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