GST UPDATE NO. 79TH ON DIVERGENT RULINGS ON AVAILABILITY OF ITC ON CSR EXPENSES: -

The admissibility of input tax credit on the CSR expenses incurred by the company has been a point of dispute since the erstwhile regime when the Cenvat Credit Rules, 2004 were prevalent. It has been held in the case of M/s Commissioner of Central Excise, Bangalore Vs Millipore India Pvt. Ltd. and M/s Essel Propack Ltd. Vs Commissioner of CGST, Bhiwandi [2018 (362) E.L.T. 833 (Tri.-Mumbai)] that CSR is mandatory requirement for PSUs and has been made obligatory also for the private sector so it is to be considered as input services eligible for credit. However, the above decisions pertain to pre-GST era whereas there are contrary rulings in the GST regime as regards admissibility of ITC on CSR expenses. The recent decision pronounced by Gujarat AAR in the case of M/s ADAMA INDIA PRIVATE LIMITED [ADVANCE RULING NO. GUJ/GAAR/R/44/2021 dated 11.08.2021] is the subject matter of discussion of our present update.

The issue involved in the present case was availability of input tax credit on expenditure incurred on various CSR activities such as civil works or installation of plant and machinery items in schools or hospitals, distribution of food kits etc. The applicant pleaded that the business incurred on the CSR activities are mandatory requirement as per the Companies Act and so shall be covered under the definition of ‘business’ under the GST Law. Reliance was also placed on the decision given by Calcutta High Court in the case of 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 the expenses be incurred for earning immediate profits.
However, the Gujarat AAR held that as per Rule 4(1) of the Companies (CSR Policy) Rules, 2014, CSR activities undertaken by the company shall exclude activities undertaken in pursuance of it’s normal course of business. As per Rule 2(d) of the Companies (CSR Policy) Amendment Rules, 2021, “CSR” does not include activities undertaken in pursuance of normal course of business of the company. Consequently, the AAR held that section 16(1) of the CGST Act, 2017, stipulates that input tax credit is admissible with respect to activities in the course or furtherance of business and so section 16(1) bars CSR activities from input/input service. The reliance placed on the decisions of pre-GST era was rejected on account of change in law and the favourable advance ruling pronounced by UP in the case of Dwarikesh Sugar Industries Ltd. was also rejected on the grounds that the advance ruling is binding only on the applicant and jurisdictional officer. Hence, the ITC on CST activities was denied by the AAR.

If the above decision is pursued, it is found that the ruling has been pronounced on absurd grounds as the provision of other law has been applied to the GST law. If the CSR Rules exclude activities undertaken during the normal course from CSR activities, it is for the reason that the company need to expend certain amount on activities other than regularly done by them. However, this cannot be taken as a ground to deny ITC under GST Laws. If any activity is not CSR at first place itself under the CSR Rules, the question of admissibility of input tax credit under GST law does not arise at all. As such, the ruling has been pronounced by moulding the interpretation to deny the ITC available to the assessee. Moreover, the decision given in the case of Dwarikesh Sugar Industries Ltd. has referral value and the analogy adopted thereon appears to be more appropriate. It has been held that gift denotes a voluntary act done out of generosity whereas CSR is obligatory in nature. Consequently, the expenditure incurred under CSR cannot be considered as gift so as to deny the benefit of input tax credit under section 17(5)(h) of the CGST Act, 2017. It is hoped that the adverse ruling pronounced by AAR is further appealed to AAAR.

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GST UPDATE NO. 79TH ON DIVERGENT RULINGS ON AVAILABILITY OF ITC ON CSR EXPENSES: -

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