CASE STUDY

BRIEF FACTS OF THE CASE:

A Departmental audit was conducted in the case of M/s Bhansali Engineering Polymers Limited (hereinafter referred to as Noticee) for the period April 2020 to March 2024. Consequently, various discrepancies were communicated to the noticee. Reply was submitted by the noticee. Later on, a show cause notice was issued by the Department based on one of the discrepancy found in audit pertaining to input tax credit availed on invoices related to Corporate Social Responsibility (CSR) Activities on the ground that the same is ineligible under Section 16 of the CGST Act 2017. The department contended that in the view of Section 16(1) of the CGST Act, the first and foremost condition for availing the ITC of inputs and input services is to ensure that the same is being used in the course or furtherance of business. Further, it was purported by SCN that as per Section 2(d) of the Companies (CSR Policy) Amendment Rules, 2021 and Rule 4(1) of the Companies (CSR) Rules, 2014 CSR means the activities undertaken by a company in pursuance of its statutory obligation laid down in Section 135 of the Act but does not includes activities undertaken in the pursuance of applicant’s normal course of business thus, ITC is not allowed on the same. Hence, as the inputs and input services pertaining to CSR activities being undertaken by the noticee are not for furtherance of business rather such activities are incurred to give back to society, hence, ITC on the same is in-eligible to be availed. Along with that, the impugned notice while denying ITC on CSR activities stated that deduction is not allowed on CSR expenditure as ‘’business expenditure” in Income Tax Act 1961 and as per Companies CSR Policy Rules 2014.
The noticee gave a detailed reply against the impugned show cause notice and CA Pradeep Jain, authorised representative of the noticee appeared for the personal hearing to present the submissions and relevant explanations on behalf of the noticee.

Submissions by Noticee:

CA. Pradeep Jainsubmitted the following contentions: -
CSR Activities are conducted in the furtherance of business:

The expenditure which is subject matter of the issue was incurred towards CSR activities undertaken due to statutory obligation under Section 135 of the Companies Act. Hence, such expenditure cannot be treated as voluntary in nature. Consequently, goods and services procured for discharging such statutory obligation are covered within the phrase “in the course or furtherance of business” within the meaning of Section 16(1) of CGST Act 2017. Further, that the Section 16(1) is of wide import and cannot be restricted to the activities directly resulting in outward taxable supplies.
Along with that, it was contended that it is a settled principle of law that business related expenditure includes all activities having nexus with carrying on business operations, preserving corporate standing, complying with legal mandates, maintaining business reputation and sustaining commercial operations. Hence, such expenditure construes direct and sufficient nexus with business to qualify under Section 16(1).
With regard to the impugned show cause notice denial of ITC on the ground that same is not allowed as deduction in Income tax act and that as per CSR policy 2014 CSR activities will not include the activities undertaken in the normal course of business of the company. It was argued that restriction under income tax act was introduced only to deny deduction under Section 37(1) and thus, cannot automatically be imported into GST legislation unless the GST statute clearly specifies the same. Hence, if an expenditure is not deductible under Section 37 of the Income tax Act does not mean that ITC becomes inadmissible under GST.
In continuation of above, argued that CSR rules merely states that CSR activities should not be activities undertaken in the “normal course of business”, however, Section 16(1) uses term “used or intended to be used in the course or furtherance of business” which is of much wider in scope. Hence, even if CSR is outside the normal course of manufacturing operations which is restricted in Companies (CSR Policy) Rules 2014, it can still be in the “furtherance of business” and therefore CSR activities are still covered in Section 16 unless specifically excluded or restricted. Had it not been covered there, there was no need to bring specific restriction on the same later by bringing it in purview of Section 17(5). It is pertinent to note that the said restriction on CSR activities by adding it to Section 17(5) of CGST Act 2017 was introduced with effect from 01.10.23. However, the period in the impugned show cause notice was F.Y. 2022-23 which is prior to date of imposition of restriction.

Hence, based on above contention ITC is very well eligible.
Section 17(5)(fa) brought into existence after the disputed period: -

It was argued that the period in issue is F.Y. 2022-23 and amendment in Section 17 of the CGST Act 2017 was brought into effect by clause no. 139 of Finance Act 2023 which inserted clause (fa) in subsection (5) of Section 17 which restricted the ITC on the expenses/purchases made for the CSR Activities. However, it is a point of emphasis that aforementioned amendment was brought into effect w.e.f. 01.10.2023 by notification no. 28/2023- Central Tax dated 31.07.2023 issued by the Central Board of Indirect Taxes and Customs.. Reliance was placed upon the following judgements :

JAHAAN STEEL LTD. v. UNION OF INDIA [2014(311) E.L.T. 11(Guj.)] and
GWALIOR ALCOBREW PVT LTD. versus COMMISSIONER OF CUSTOMS, INDORE [2014(309)E.L.T. 692(Tri-Del.)].
In the above mentioned cases, it was held that a provision is always applicable prospectively unless the statute itself specifically gives a retrospective effect to it. Hence, the impugned show cause notice is invalid in denying ITC on the activities which were undertaken prior to the said amendment came into effect.
Expenditure incurred for CSR was mandatory and not voluntary:

In continuation of above, definition of CSR as per sub section (1) and (5) of Section 135 of Companies Act 2013 was referred and on plain reading of the provisions, it was found that the above mentioned provisions clearly depicts that there is mandatory requirement for specified companies which are covered under the purview of the above mentioned provisions. As the requirement is mandated by the provisions of law, it is crystal clear that for ensuring smooth functioning, noticee was required to comply with the requirements of CSR activities.

Demand of interest not quantified:

In view of above made submissions, it is crystal clear that the demand of tax is not legally sustainable. As the demand of tax is not sustainable, the question of paying interest does not arise. Reliance was placed upon the judgement of Hon’ble Allahbad High Court in the case of M/s Ziva Auto Sales v. State of U.P. [2026:AHC-LKO:6014-DB]. in which it was categorically held that no interest liability can be imposed unless the same is specifically quantified in SCN.

Invoking Section 74 is unjustified:

Impugned order has confirmed the demand raised by impugned SCN issued under Section 74 of the CGST Act. For this reference was made to the provisions of Section 74, the analysis of which makes it crystal clear that this section is invokable only if there is fraud, wilful misstatement or suppression of facts to evade tax. As the noticee had produced all the documents before the audit department during the audit. Further, these details are also filed before MCA/ROC which are statutory authorities. Hence, as all the details of CSR activities are disclosed and reported to Government bodies, and forms part of statutory reports, the same cannot be suppressed by the co.

Penalty is not imposable:

Penalty cannot be imposed without proving mens rea or presence of guilty mind. Reliance was placed upon Hindustan Steel v. State of Orissa [1978 2 ELT J 159 (Supreme Court)] held that an order imposing penalty for failure to meet statutory obligation is a result of proceedings which are quasi-judicial in nature and penalty should not be ordinarily be imposed unless the person acted deliberately in defiance of law or was guilty of misconduct.

Judgement & Findings:

The adjudicating authority observed and decided the matter in following manner:
Statutory Nature of CSR Obligations under the Companies Act

It was held that CSR activities are governed by the statutory framework prescribed under the Companies Act and the Companies (CSR Policy) Rules, 2014. CSR activities are required to be undertaken by the company in accordance with its CSR policy and may consist of projects, programmes or activities, whether new or ongoing. The CSR framework itself excludes certain activities from the definition of CSR, including activities undertaken in pursuance of the normal course of business, activities outside India subject to specified exceptions, political contributions, activities benefitting employees, activities undertaken for marketing benefits and activities carried out in fulfilment of other statutory obligations. Thus, CSR expenditure incurred by a company covered by the statutory CSR provisions cannot merely be regarded as a voluntary charitable donation. Where the expenditure is incurred pursuant to a statutory obligation applicable to the company, it arises from the corporate and business framework within which the company operates.

Meaning of “In the Course or Furtherance of Business” under Section 16(1)

Analysis of the term “during the course of business/normal course of business or furtherance of business” was conducted. It was observed that bare perusal of Section 16(1) does not provides that expenditure must be incurred for earning an immediate profit, rather, the admissibility of ITC will be determined on the basis of fact that whether the inward goods/services are used or intended to be used in the course or furtherance of business. Hence, it was held that the expression “business” and “furtherance of business” assumes importance. Further, the intent of legislature is not restrictive regarding the ITC of inputs. Further, vide Companies (CSR Policy) Amendment Rules 2021, even the definition of CSR itself excluded activities undertaken in pursuance of normal course of business of the co. Provides that every registered person is entitled to ITC of tax charged on supplies of goods/services “which are used or intended to be used in the course or furtherance of business”. Restrictive interpretation whereby only inputs directly consumed in manufacture or directly incorporated into the taxable outward taxable supply.
Further, it was observed on bare perusal of concept of CSR, that it is not an independent activity of some third party, rather it is statutory obligation imposed upon the company. Further, that CSR expenditure under Section 135 of the Co Act 1956 is not merely a voluntary charitable donation as the said provision applies to prescribed companies and imposes statutory responsibility on them to undertake CSR activities.

“Furtherance of Business” is Wider than “Normal Course of Business”

Further based on bare reading of Section 16(1), it was held that, the said section deliberately used two expressions “in the course of business” and “furtherance of business”. The word “furtherance” is materially wider than the expression “for the purpose of earning profit” and the business is not restricted to the physical activity of manufacturing/selling goods only.
In continuation of above, it was observed that the business necessarily includes various aspects such as statutory compliances, corporate governance statutory obligations, stakeholders’ obligations and activities necessary for maintaining the legal & commercial existence of the enterprise. Further that CSR, when mandated by Section 135 falls within this broader definition. Hence, it was held that an expenditure which a taxpayer is statutorily compelled to incur as a consequence of carrying on its corporate/business operations cannot automatically be regarded as expenditure having no nexus whatsoever with business. For this reliance was placed upon the decision of Karnataka High Court in the case of Commissioner of Central Excise v. Stanzen Toyotetsu India (P) Ltd. in which it was held that proposition that business nexus is not confined to the immediate manufacturing process. This line of analogy is in Section 16(1) of the CGST Act. Therefore, CSR Expenditure similarly have a nexus with the legal and corporate functioning of the taxpayer. Further reliance was placed upon the Karnataka high court judgement in the case of Commissioner of Central Excise, Bangalore v. Millipore India Pvt Ltd. [2012 (26) S.T.R. 514 (Kar.)] in which it was held that “activities relating to business” have wider scope than the activities directly involved in manufacture.
Further, it was held that the definition of business as per Section 2(17) supports a broad interpretation as it defined “business” very broadly. Definition is inclusive and covers trade, commerce, manufacture, profession, vocation etc. Together with activities incidental or ancillary to such activities. GST does not employ a narrow concept of business confined only to the immediate taxable supply. Furtherance implies advancement, promotion of scheme etc. Therefore, furtherance of business would imply advancement or promotion of business. Failure to incur these expenses could result in punitive actions and leads to disclosure of non-compliance in board report which could be a public document leading to tarnish the image of a company. Thus, CSR expenditure is well needed to run business smoothly.

Thus, based on above observations, it was observed that impugned SCN is trying to substitute the statutory expression “in the course or furtherance of business” with the much narrower expression “directly used for making outward taxable supplies”. Such substitution is impermissible because legislature consciously employed the wider expression in Section 16(1) of the CGST Act 2017. CSR expenditure is incurred to comply with the Companies Act qualified as expenditure in the course of business will be eligible for ITC under Section 16(1) of the . In this regard, reliance was placed upon the judgement in the case of Essel Propack Ltd. v. Commissioner of CGST, Bhiwandi, Appeal No. (362) E.L.T. 833 (Tri-Mumbai)] in which CENVAT credit of service tax paid on services used for CSR activities.

Controversy itself identified in the GST Council Meeting

Further, it was observed that GST council itself recognized the controversy as the GST council agenda of 48^th GST council meeting records the doubts had arisen regarding availability of ITC on CSR expenditure and notes two conflicting views: one view as per which CSR expenditure conducted pursuant to Section 135 was a statutory obligation hence, ITC should be allowed and the other view that CSR activities are conducted outside the normal course of business. Hence, there was no clarity before 01.10.2023 and after which it was placed under category of blocked credit under Section 17(5) of the CGST Act 2017 thus, there was no such restriction on the taxpayer for the period under dispute as alleged in the impugned SCN.

No Requirement of One-to-One Nexus with Taxable Outward Supply

In continuation of above, it was observed that the law does not require a one to one or immediate nexus between the inward supply and a taxable outward supply. It requires use in the course or furtherance of business. CSR may contribute to maintain the distinction between “normal course of business” versus "furtherance of business”. It expressly uses course or furtherance of business. Therefore, even assuming CSR is not part of the taxpayer’s normal commercial activity that does not conclusively answer the question. Further it was held that “furtherance of business” must independently be given meaning as “Normal course of business” cannot override the statutory expression “furtherance”. Section 16(1) employs the wider expression in the course or “furtherance of business”. Hence, any activity may not constitute the normal revenue-generating activity of the taxpayer and yet may qualify as being in the furtherance of this business.

Legislative Amendment from 01.10.2023

In continuation of above, it was observed that for the period prior to 01.10.2023, there was no specific clause under Section 17(5) which explicitly provides that ITC relating to CSR obligations under Section 135 of the Companies Act was inadmissible. Moreover, the restriction inserted via Section 17(5)(fa) has not been imposed retrospectively w.e.f. 01.07.2017.

Subsequent Amendment Cannot be Applied Retrospectively

It was held that incurred by a company covered by Section 135 of the Companies Act CSR expenditure cannot be treated as charitable or social in nature merely on account of its character and the same being having no connection whatsoever with the business as such expenditure arises from the statutory obligations. Furthermore, insertion of Section 17(5)(fa) with effect from 01.10.2023 is also a relevant indicator of the legislative scheme and such restriction cannot be read as retrospectively into a period which the said claude did not exist. Reliance was placed upon the judgement of Supreme Court in the case of ALD Automotive Pvt Ltd. v. Commercial Tax [(2019) 13 SCC 225]in which it was held that since ITC is governed by statute, its denial must also have a statutory basis. In the instant case, the disputed period belongs to prior to 01.10.2023 regime and thus denial has no statutory basis as ITC on CSR expenses was blocked w.e.f. 01.10.23 only.
With regard to the allegation that CSR Expenses have not been covered under “Business Expenditure” under Section 37 of the Income Tax Act 1961. Two statutes must have different legislative schemes as Income tax law concerns is deductible. A particular expenditure is not deductible under the Income Act as it does not automatically determine whether the GST paid on the corresponding inward supply qualifies as Section 16(1) of the CGST Act 2017. Importing the income tax test into gst would amount to adding a condition to Section 16(1) which does not exist. Thus, it was held that noticee has rightly availed ITC in terms of relevant sections of CGST Act 2017 and hence, the impugned show cause notice was set aside.

AUTHOR’s COMMENT:

The present order highlights an important aspect of the interpretation of Section 16(1) of the CGST Act, namely, the distinction between “in the course of business” and “in furtherance of business.” The expression used by the legislature is not confined to expenditure incurred in the normal or routine course of business. If the legislature intended to restrict ITC only to activities forming part of the ordinary commercial operations of a taxpayer, the expression “furtherance of business” would not have been used. The term furtherance of business has been consciously used. Therefore, an activity may not form part of the taxpayer’s normal business of manufacturing goods or providing taxable services and may not directly generate revenue, but that does not, by itself, take the expenditure outside the scope of “furtherance of business”. Where the expenditure is incurred because of a statutory obligation arising from the taxpayer’s business and corporate status, its nexus with the business has to be examined in the broader statutory context rather than by applying a narrow test of whether the activity is undertaken in the taxpayer’s ordinary course of trade. The order in the instant case thus reinforces a broader principle of GST jurisprudence: the test of business nexus cannot be reduced to a test of immediate revenue generation or activities undertaken in the normal course of business. “Furtherance of business” is an independent statutory expression and must be given meaningful scope while determining ITC eligibility.

CA Pradeep Jain_

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PJ case study/2026-27/13

CASE STUDY

BRIEF FACTS OF THE CASE:

Submissions by Noticee:

Judgement & Findings:

AUTHOR’s COMMENT:

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