2023 (6) TMI 1181 - AAR - GST

Input Tax Credit - GST paid on various services/ expenses incurred towards discharging its CSR obligation - to be considered as being in course or furtherance of business in terms of Section 16(1) of the CGST Act, 2017 r/w UPGST Act, 2017 or not - HELD THAT - As per Rule 4(1) above (for the period prior to 23-1-2021), the CSR activities undertaken by the company shall exclude activities pursuance of applicant s normal course of business. Companies must ensure that none of these activities is included in their CSR policy as they have specifically been excluded from the definition of CSR. It has been clarified that any costs incurred as a result of these actions are not eligible for CSR credit - The new CSR Rules along with Section 135 of the Act has created a very strict regulatory framework for CSR activities. Earlier the Parliament intended for Section 135 compliance to be voluntary rather than compulsory. Now the CSR activities are independent of normal business activities of the entity requiring separate registration and records for compliance of law. The CSR Policy and projects approved by The Board of Directors are implemented by a CSR Committee which is made public on the website. As per Rule 4 on and after April 1, 2021 Companies can undertake CSR activities only through implementing agencies which are registered with MCA. These implementing agencies will have to file e-form CSR-1 with MCA portal and will receive unique CSR registration number. Rule 7(4) says that the CSR fund may be spent by a company for creation or acquisition of a capital asset which shall be held in the name of only section 8 company or registered public trust or registered society having CSR registration number and cannot be held in the name of the company itself. For existing capital assets compliance within 180 days is required. Thus the corporation cannot directly own this capital asset that was made or purchased with CSR funding. It is also prescribed that the surplus generated by CSR activities will not be included in a company s business profit and will be transferred to the Unspent CSR Account or reinvested in the same project. The company should transfer any unspent CSR funds to any funds listed in Schedule VII of the Act until a fund is specified in Schedule VII in accordance with sections 135(5) and 135 (6) of the Act. Section 16(1) of the CGST Act, stipulates that a registered person is entitled to take credit of input tax charged on any supply of goods or services or both, which are used or intended to be used in the course or furtherance of his business. Thereby, Section 16 (1) of the CGST Act bars CSR activities from input/input service. CSR activities, as per Companies (CSR Policy) Rules, 2014 are those activities excluded from normal course of business of the applicant and therefore not eligible for ITC, as per Section 16(1) of the CGST Act.

Summary

Issues Involved:
1. Admissibility of Input Tax Credit (ITC) on expenses incurred towards discharging Corporate Social Responsibility (CSR) obligations.

Issue-wise Detailed Analysis:

1. Admissibility of Input Tax Credit (ITC) on CSR Expenses:

Applicant's Submission:
- The applicant, a registered GST entity, sought an advance ruling on whether it is entitled to avail ITC for GST paid on various services/expenses incurred towards discharging its CSR obligations.
- The applicant argued that expenses incurred for CSR activities qualify as being in the course or furtherance of business and thus eligible for ITC under Section 16 of the CGST Act.
- The applicant emphasized that CSR activities are mandatory under Section 135 of the Companies Act, 2013, and failure to comply would result in serious penal consequences, thus affecting the smooth functioning of its business.
- The applicant cited previous rulings and case laws, including the Hon'ble CESTAT in Essel Propack Ltd. and the Hon'ble High Court of Karnataka in Millipore India (P) Ltd., to support their claim that CSR activities are integral to business operations and should be eligible for ITC.

Jurisdictional GST Officer's View:
- The Jurisdictional GST Officer opined that CSR expenses, being an obligation under the Companies Act, cannot be considered as furtherance of business and are not eligible for ITC.

Authority for Advance Ruling (AAR) Analysis:
- The AAR examined the provisions of Section 16(1) of the CGST Act, which allows ITC on supplies used in the course or furtherance of business.
- The AAR referred to the Companies (CSR Policy) Rules, 2014, which state that CSR activities should exclude activities undertaken in the normal course of business.
- The AAR noted that the new CSR Rules and Section 135 of the Companies Act create a strict regulatory framework, making CSR activities independent of normal business activities and requiring separate registration and records.
- The AAR concluded that CSR activities, as per the Companies (CSR Policy) Rules, 2014, are excluded from the normal course of business and thus do not qualify for ITC under Section 16(1) of the CGST Act.

Ruling:
- The AAR ruled that CSR activities, as per the Companies (CSR Policy) Rules, 2014, are excluded from the normal course of business of the applicant and therefore are not eligible for ITC as per Section 16(1) of the CGST Act.
- The ruling is valid within the jurisdiction of the Authority for Advance Ruling, Uttar Pradesh, and subject to the provisions under Section 103(2) of the CGST Act, 2017, until and unless declared void under Section 104(1) of the Act.

Conclusion:
- The AAR held that expenses incurred towards discharging CSR obligations do not qualify for ITC under the CGST Act as they are not considered to be in the course or furtherance of business.