Availability of ITC on CSR Expenses

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Availability of ITC on CSR Expenses
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• Authority for Advance Rulings, Telangana (AAR)
  in the case of M/s Bambino Pasta Food Industries
  Private Limited the applicant has issued a
  ruling regarding availability of Input Tax Credit
  on CSR expenses incurred by the applicant
  company. Captioned ruling has been analyzed in
  this update.
• 1. FACTS OF THE CASE (relevant extracts) The
  petitioner is a private limited company engaged
  in the is a manufacturer of Vermicelli and pasta
  Products. Applicant has donated oxygen plant to
  AIIMS hospital Bibinagar, Yadadri Bhongir
  District, for the benefit of patients who were
  suffering with low oxygen levels. For this
  purpose, the applicant has purchased PSA oxygen
  plant and spare parts for that oxygen plant for
  Rs.62,74,200 which includes IGST paid of Rs
  9,16,200
• 2. QUESTIONS BEFORE THE AAR Whether ITC is
  available on CSR expenditure spent by the
  company?

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• 3. CONTENTION OF THE APPLICANT (relevant
  extracts)        
• That it is eligible to claim ITC on the CSR
  expenditure spent by it since it is spent in
  accordance with the provisions laid down by
  Companies Act, 2013.
• CSR expenses incurred by the applicant have been
  mandated under the Companies Act, 2013. That CSR
  expenses are not incurred voluntarily,
  accordingly, applicant is of the opinion that it
  doesnt qualify as gift and therefore its
  credit is not restricted under Section 17(5) of
  the CGST Act, 2017.
• That non-spending of CSR funds will definitely
  have an impact on the functioning of company as
  penal provisions under Companies Act 2013 will
  have financial impact as well as on how the brand
  is perceived by the customers.
• That a Company incurs CSR expenditure under
  statutory compulsion, which is certainly incurred
  because of running of business and by no stretch
  of imagination, could it be considered as gift
  for any reason.

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• 4. RELEVANT LEGAL PROVISIONS REFERRED
                                                    
               
• Section 17(5)(h) of CGST Act, 2017
• 5. OBSERVATION AND RULING BY THE AAR AAR noted
  that under the Companies Act, 2013, the Companies
  with a specified net worth or net profit are
  obliged to incur a minimum of 2 of their net
  profit towards their corporate social
  responsibility (CSR) and failure to do so will
  attract penalty under sub section 7 of Section
  135 of the said Act which may go upto a maximum
  of Rs.1 Cr.,. Thus, the running of the business
  of a company will be substantially impaired if
  they do not incur the said expenditure.
  Therefore, the expenditure made towards corporate
  responsibility under section 135 of the Companies
  Act, 2013, is an expenditure made in the
  furtherance of the business. AAR finally ruled as
  under on the stated questions The expenditure
  made towards corporate responsibility under
  section 135 of the Companies Act, 2013, is an
  expenditure made in the furtherance of the
  business. Hence the tax paid on purchases made to
  meet the obligations under corporate social
  responsibility will be eligible for input tax
  credit under CGST and SGST Acts.

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• 6. Our comments            
• AAR has dealt with the legal provisions in depth
  and provided a reasoned order conforming to
  general understanding earlier UP AAR ruling in
  M/s Dwarikesh Sugar Industries Limited that ITC
  benefit on CSR expenditure would be available as
  the CSR activities are mandatory for specified
  companies under a statute which makes it integral
  and sine qua non for continued business
  operations. Since CSR activity is mandated by
  Section 135 of the Companies Act, 2013 for some
  classes of companies and not voluntary, therefore
  CSR activity would not be regarded as gift. Clear
  difference needs to be carved out between goods
  given as gift and those supplied as part of CSR
  activities. While the former is voluntary and
  occasional, the latter is obligatory and regular.
  Thus, any activity which is mandatory for a
  business entity to ensure continuity of business
  operations in view of law of the land has to be
  treated as incurred in the course of business
  and thus input tax credit of GST paid on the same
  would be available.

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• This ruling would enable companies to consider
  taking ITC on various Covid relief expenses
  incurred which are being claimed as CSR
  expenditure in accordance with the FAQs issued by
  Ministry of Corporate Affairs through General
  Circular No.15/2020 dated 10th April 2020.
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