CSR expenditure under Section 135 Companies Act qualifies for input tax credit as business expenditure

AAR Telangana held that expenditure incurred for corporate social responsibility under Section 135 of the Companies Act, 2013 constitutes business expenditure. The authority ruled that input tax credit under CGST and SGST Acts is available on purchases made to fulfill CSR obligations, as such expenditure is considered to be in furtherance of business activities despite being mandatory compliance requirements.

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Issues:
1. Admissibility of Input Tax Credit (ITC) on Corporate Social Responsibility (CSR) expenditure.

Analysis:
The applicant, a manufacturer of Vermicelli and pasta products, sought an advance ruling on the admissibility of ITC on CSR expenditure incurred. The applicant donated an oxygen plant to a hospital during the COVID-19 pandemic, citing compliance with Section 135 of the Companies Act, 2013. The applicant contended that since CSR expenses are mandatory under the Companies Act, 2013, and essential for business operations, they should be eligible for ITC. The applicant referenced legal definitions of 'gift' to distinguish between voluntary gifts and CSR expenses. The applicant argued that CSR expenses are not voluntary but obligatory, making them distinct from gifts, hence eligible for ITC.

The applicant relied on a judgment by Hon'ble CESTAT Mumbai, emphasizing the importance of CSR for business sustainability. Additionally, the applicant highlighted the business expediency principle, stating that expenses incurred for CSR activities are necessary for the company's long-term profitability. The applicant argued that CSR activities, being essential for business continuity, should not be considered as 'gifts' under Section 17(5)(h) of the CGST Act, making them eligible for ITC.

The AAR examined the applicant's submissions and the relevant provisions of the Companies Act, 2013. Section 135 mandates companies meeting specified criteria to allocate a percentage of their net profits towards CSR activities. Failure to comply with this provision attracts penalties, indicating the significance of CSR expenditure for business operations. The AAR concluded that expenses incurred towards CSR under Section 135 of the Companies Act, 2013, are in furtherance of business objectives. Therefore, the tax paid on purchases made for CSR obligations qualifies for ITC under the CGST and SGST Acts.

In the ruling, the AAR clarified that the expenditure on corporate responsibility under Section 135 of the Companies Act, 2013, is considered an essential business expenditure. Consequently, the tax paid on purchases made to fulfill CSR obligations is eligible for input tax credit under the CGST and SGST Acts. The ruling affirms that CSR expenses, being mandatory for certain companies, are integral to business operations and hence qualify for ITC.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the rationale behind the ruling on the admissibility of ITC on CSR expenditure as per the provisions of the Companies Act, 2013 and the GST Acts.

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