UP AAR allows ITC on CSR Expenditure

The Applicant, engaged in the business of business of manufacture and sale of sugar and allied products, had been obligated under the Companies Act to comply with Corporate Social Responsibility (‘CSR’). Accordingly, the Applicant had undertaken the following activities to comply with the CSR:

• Construction of school building, additional rooms, laboratories, etc.;
• Free supply of furniture / fittings such as tables, chairs etc., to be used in the school;
• Free supply of electrical goods for use in school; and
• Other expenses such as provision of goods / services to Registered Charitable Trusts / NGO’s

 In view of the above, the Applicant had filed an Application before the UP AAR to ascertain:

• Whether expenses incurred in order to comply with CSR qualified as being in the course of business and eligible for ITC under the CGST Act;
• Whether ITC in relation to CSR activities obligated under the Companies Act are restricted u/s. 17(5) of the CGST Act;
• Whether free supply of goods as a part of CSR is restricted u/s. 17(5) of the CGST Act;
• Whether goods and services used for construction of school building, which is not capitalized in the books of accounts is restricted u/s. 17(5) of the CGST Act.

It was submitted by the Applicant that the term ‘In the course of business’ includes all activities which are incidental / ancillary to the business, which are incurred during the course of business. It was further submitted that as a Company is compulsorily required to undertake CSR activities, they become an essential part of the business process as a whole and thus shall treated to be incurred in the course of business.

The Applicant had further submitted that CSR expenses are incurred in the course of business, however its actual benefits are reaped by the intended recipients and not by the Company. Since the benefits are rendered to the society and not the Company, restrictions under Section 17(5) of the CGST Act would not apply.

Referring to the judgement of Mumbai Tribunal in the case of Essel Propack Limited [2018(362) E.L.T. 833], it was observed by the AAR that since CSR has been made obligatory also for the private sector, unless the same is to be treated as input service in respect of activities relating to business, production and sustainability of the company itself would be at stake.

The AAR further observed that as per Section 17(5)(h) of the CGST Act, ITC shall not be available inter alia in respect of goods disposed of by way of gift or free samples. It was observed that in common parlance gift is provided to someone occasionally, without consideration and which is voluntary in nature.

Accordingly, the AAR noted that a clear distinction was required to be drawn between goods given as ‘gift’ and those provided /supplied as a part of CSR activities. While the former is voluntary and occasional, the latter is obligatory and regular in nature. As it is the Applicant’s obligation to incur such expenses, they do not qualify as ‘gifts’ and therefore, ITC is not restricted under Section 17(5) of the CGST Act.

Further, relying upon the ruling of Rajasthan AAR in Rambagh Palace Hotels Private Limited [RAJ/AAR/2019-20/05 dated 16.04.2019], it was observed that ITC in general is not available for construction, reconstruction, renovation, addition, etc. of an immovable property even when such goods or services or both are used in course or furtherance of business. However, the limitation in such a scenario is extent of capitalization. Accordingly, it was ruled by the AAR that the ITC of goods and services used for construction of school building will not be available to the Applicant to the extent of capitalization.

Dwarikesh Sugar Industries Limited [Order No. 52 dated 22.01.2020]

Disclaimer:

The information provided in this update is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This update is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial/ quasi judicial authorities may not take a position contrary to the views mentioned hereinrra quis.