2020 (1) TMI 1430 - AAR - GST

Ruling: CSR Expenses Eligible for Input Tax Credit under CGST Act

The ruling determined that CSR expenses are considered incurred 'in the course of business' and are eligible for input tax credit (ITC) under Section 16 ... Eligibility for input tax credit - course or furtherance of business - Corporate Social Responsibility (CSR) - blocked credits under Section 17(5) - gift - restriction of ITC on construction to extent of capitalisationEligibility for input tax credit - course or furtherance of business - Corporate Social Responsibility (CSR) - CSR expenses incurred to comply with the Companies Act, 2013 qualify as incurred in the course or furtherance of business and are eligible for input tax credit under Section 16 of the CGST Act, 2017. - HELD THAT: - The Authority examined the statutory definition of 'business' in Section 2(17) and the eligibility clause in Section 16(1) of the CGST Act, and noted that activities incidental or ancillary to business fall within 'course or furtherance of business.' The Companies Act mandates certain companies to incur CSR expenditure (Section 135) and non-compliance may affect business continuity. Relying on appellate and judicial authority recognising CSR expenditure as connected with business sustainability and as an input service, the Authority held that compulsory CSR activities undertaken to comply with law become part of the business process and therefore the input tax on supplies procured for such CSR activities is eligible as input tax credit. [Paras 12, 13, 16]Yes, CSR expenses incurred to comply with the Companies Act, 2013 are in the course of business and eligible for ITC.Blocked credits under Section 17(5) - gift - Corporate Social Responsibility (CSR) - Free supply of goods made as part of mandated CSR activities is not a 'gift' for the purposes of Section 17(5)(h) and therefore such supplies do not attract the restriction under that clause. - HELD THAT: - Section 17(5)(h) disallows ITC where goods are 'disposed of by way of gift or free samples.' The Authority observed that 'gift' in common parlance denotes a voluntary, occasional transfer without consideration. CSR supplies in this case are obligatory under the Companies Act and are regular/mandated, not voluntary gratuities. Drawing distinction between voluntary gifts and compulsory CSR outlays, and considering judicial dicta on the nature of gifts, the Authority concluded that goods supplied as part of statutory CSR obligations do not fall within the prohibition in Section 17(5)(h). [Paras 13, 16]No, free supply of goods as part of mandated CSR activities is not restricted under Section 17(5)(h).Restriction of ITC on construction to extent of capitalisation - blocked credits under Section 17(5) - Input tax credit on goods and services used for construction of an immovable property (school building) is restricted to the extent of capitalisation under Section 17(5)(c) and 17(5)(d) of the CGST Act, 2017. - HELD THAT: - Clauses (c) and (d) of Section 17(5) expressly restrict ITC on works contract services and goods/services received for construction of immovable property (other than plant and machinery) to the extent of capitalisation. The Authority noted prior rulings applying this limitation and interpreted the Explanation to clauses (c) and (d) which links construction-related inputs to the extent they are capitalised. Accordingly, where goods or services used for constructing the school building are capitalised in the books, the input tax credit on such portion is not available. [Paras 14, 15, 16]ITC on goods and services used for construction of the school building is not available to the extent of capitalisation.Final Conclusion: Advance ruling: CSR expenditures mandated by the Companies Act qualify as incurred in the course of business and are eligible for ITC; supplies made free under mandated CSR are not 'gifts' and thus not barred by Section 17(5)(h); ITC for construction of an immovable property (school building) is disallowed to the extent those inputs are capitalised. Issues Involved:1. Eligibility of CSR expenses for input tax credit (ITC) under Section 16 of the CGST Act, 2017.2. Restriction of ITC for free supply of goods under Section 17(5)(h) of the CGST Act, 2017.3. Restriction of ITC for goods and services used in construction of school buildings under Section 17(5)(c) and 17(5)(d) of the CGST Act, 2017.Detailed Analysis:Issue 1: Eligibility of CSR Expenses for ITCThe applicant, a registered assessee under GST, engages in CSR activities as mandated by Section 135 of the Companies Act, 2013. The primary question is whether these CSR expenses qualify as being incurred 'in the course of business' and are eligible for ITC under Section 16 of the CGST Act, 2017.Section 16(1) of the CGST Act, 2017 states that every registered person is entitled to take credit of input tax charged on any supply of goods or services used or intended to be used in the course or furtherance of business. The term 'business' under Section 2(17) of the CGST Act, 2017 includes activities incidental or ancillary to trade, commerce, manufacture, etc.The ruling cites the Hon'ble CESTAT Mumbai in M/s. Essel Propack Ltd. Vs. Commissioner of CGST, Bhiwandi, which observed that CSR activities are integral to business strategy and sustainability. Similarly, the Hon'ble High Court of Karnataka in M/s. Commissioner of Central Excise, Bangalore Vs. Millipore India (P) Ltd. ruled that CSR expenses, being statutory obligations, form part of business costs, thus qualifying for ITC.Ruling: CSR expenses are considered incurred 'in the course of business' and are eligible for ITC under Section 16 of the CGST Act, 2017.Issue 2: Restriction of ITC for Free Supply of GoodsThe applicant supplies furniture, fittings, and electrical goods to schools as part of CSR activities free of cost. The question is whether these free supplies are restricted under Section 17(5)(h) of the CGST Act, 2017, which disallows ITC on goods disposed of by way of gift or free samples.The ruling clarifies that the term 'gift' implies a voluntary transfer without consideration, which is not the case for CSR activities mandated by law. The Hon'ble Supreme Court in Ku. Sonia Bhatia v. State of UP defined a gift as a voluntary transfer without consideration. Since CSR activities are obligatory and not voluntary, they do not qualify as gifts.Ruling: Free supply of goods as part of CSR activities is not restricted under Section 17(5)(h) of the CGST Act, 2017, and ITC is available.Issue 3: Restriction of ITC for Construction ActivitiesThe applicant uses goods and services for constructing school buildings, which are not capitalized in the books of accounts. The question is whether ITC on these goods and services is restricted under Section 17(5)(c) and 17(5)(d) of the CGST Act, 2017.Section 17(5)(c) and 17(5)(d) restrict ITC on works contract services and goods/services used for construction of immovable property to the extent of capitalization. The ruling refers to the Authority for Advance Ruling-Rajasthan in M/s. Rambagh Palace Hotels Pvt Ltd, which observed that ITC is not available for construction activities to the extent of capitalization.Ruling: ITC on goods and services used for constructing school buildings is not available to the extent of capitalization.Conclusion:1. CSR expenses qualify as being incurred in the course of business and are eligible for ITC under Section 16 of the CGST Act, 2017.2. Free supply of goods as part of CSR activities is not restricted under Section 17(5)(h) of the CGST Act, 2017.3. ITC on goods and services used for construction of school buildings is not available to the extent of capitalization under Section 17(5)(c) and 17(5)(d) of the CGST Act, 2017.