The Authority for Advance Ruling (AAR), Uttar Pradesh in its recent ruling in the case of M/s Dwarikesh Sugar Industries Limited has held that expenses incurred towards Corporate Social Responsibility by the Company in order to comply with requirements under the Companies Act, 2013 are to be treated as incurred in the course of business and therefore, eligible for Input Tax Credit (ITC) in terms of Section 16 of the CGST Act.
Facts of the Case:
The applicant, M/s. Dwarikesh Sugar Industries Limited, is a Company engaged in the business of manufacture and sale of sugar and allied products. In order to comply with the CSR norms in terms of Section 135 of the Companies Act, the Applicant undertakes certain activities like construction of school building, free supply of furniture to the school etc. In order to undertake the CSR activities, the Applicant procures various goods and services on which GST is charged by the supplier.
Issues on which Ruling was sought:
- Whether expenses incurred by the Company in order to comply with requirements of CSR requirement under the Companies Act, qualify as being incurred in the course of business and eligible for ITC in terms of Section 16 of the CGST Act.?
- Whether free supply of goods as a part of CSR activities is restricted under Section 17(5)(h) of CGST Act?
- Whether goods and services used for construction of school building which is not capitalized in the books of accounts is restricted under Section 17(5)(c) / Section 17(5)(d) of CGST Act?
Order of UP AAR: Deliberation and Ruling
- We observe that any Company, who meets the criteria for CSR, is mandatorily required to incur in CSR activities to be compliant with the Companies Act, 2013 and non-compliance of these provisions may lead to business disruptions.
- We observe that the applicant is compulsorily required to undertake CSR activities in order to run its business and accordingly, it becomes an essential part of his business process as a whole. Therefore the said CSR activities are to be treated as incurred ‘in the course of business’.
- The term “Gift’ has not been defined under the CGST Act, however in common parlance, gift is provided to someone occasionally, without consideration and which is voluntary in nature.
- A clear distinction needs 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 later is obligatory and regular in nature. CSR expenses incurred by the Applicant have been mandated under the Companies Act. It is the Applicant’s obligation to incur such expenses in order to be in compliant with the law.
- Since CSR expenses are not incurred voluntarily, accordingly, they do not qualify as ‘gifts’ and therefore, its credit is not restricted under Section 17(5) of the CGST Act.
- Section 17(5)(c) & (d) of the CGST Act, has specifically restricted the ITC on construction / work contract service to the extent of capitalization. Accordingly, the ITC of goods and services used for construction of school building will not be available to the Applicant to the extent of capitalization.
In view of the above deliberations, AAR, Uttar Pradesh in held that ITC can be availed on CSR expenses incurred to comply with requirement of Companies Act,2013. It was further held that free supply of goods as part of CSR activities will not be restricted under Section 17(5)(h) of CGST Act,2017. It was also adjudged that goods and services used for construction of school building which is not capitalized will not be restricted under section 17(5)(c) / 17(5)(d) of CGST Act and that ITC is not available to the extent of capatalisation.
READ/ DOWNLOAD ORDER:
Also Read: Can we avail ITC of CGST and SGST of other State, where we are not registered
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CA. Mohammad Salim is an ICAI award winning Chartered Accountant having rich experience of more than 20 years in the field of indirect taxes. He is the Member, Indirect Taxes Committee of PHD Chamber of Commerce and Industry. He is author of four successful books on GST published by Taxmann Publication and is also GST expert on taxmann portal.
