2020 (1) TMI 1430 - AAR - GST

Input Tax credit - expenses incurred by the Company in order to comply with requirements of Corporate Social Responsibility (CSR) under the Companies Act, 2013 - incurred in the course of business or not - Section 16 of the Central Goods and Services Tax Act, 2017 - restriction on free supply of goods as a part of CSR activities u/s 17 (5) (h) of CGST Act, 2017 - Restriction on goods and services used for construction of school building which is not capitalized, u/s 17 (5) (c) / 17 (5) (d) of CGST Act, 2017. CSR activities - HELD 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 . Free supply of goods as a part of CSR activities - restricted under Section 17 (5) (h) of CGST Act, 2017 or not - HELD THAT - The section restricted credit of the goods which were written off or disposed off by way of gift or free samples. Now the moot question before us is to decide whether the furniture / fittings such as tables, chairs etc. and electrical goods supplied by the applicant are to be treated as gift or not. The term Gift' has not been defined under the CGST Act, 2017, 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, 2013. 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, 2017. Goods and services used for construction of school building which is not capitalized - restriction u/s (5) (c) / 17 (5) (d) of CGST Act, 2017 - HELD THAT - Section 17 (5) (c) (d) of the CGST Act, 2017 has specifically restricted the ITC on construction / work contract service to the extent of capitalisation - the ITC of goods and services used for construction of school building will not be available to the applicant to the extent of capitalisation.

Issues Involved:
1. Eligibility of CSR expenses for input tax credit (ITC) under Section 16 of the CGST Act, 2017.
2. Restriction of ITC for free supply of goods under Section 17(5)(h) of the CGST Act, 2017.
3. Restriction of ITC for goods and services used in construction of school buildings under Section 17(5)(c) and 17(5)(d) of the CGST Act, 2017.

Detailed Analysis:

Issue 1: Eligibility of CSR Expenses for ITC
The applicant, a registered assessee under GST, engages in CSR activities as mandated by Section 135 of the Companies Act, 2013. The primary question is whether these CSR expenses qualify as being incurred "in the course of business" and are eligible for ITC under Section 16 of the CGST Act, 2017.

Section 16(1) of the CGST Act, 2017 states that every registered person is entitled to take credit of input tax charged on any supply of goods or services used or intended to be used in the course or furtherance of business. The term "business" under Section 2(17) of the CGST Act, 2017 includes activities incidental or ancillary to trade, commerce, manufacture, etc.

The ruling cites the Hon'ble CESTAT Mumbai in M/s. Essel Propack Ltd. Vs. Commissioner of CGST, Bhiwandi, which observed that CSR activities are integral to business strategy and sustainability. Similarly, the Hon'ble High Court of Karnataka in M/s. Commissioner of Central Excise, Bangalore Vs. Millipore India (P) Ltd. ruled that CSR expenses, being statutory obligations, form part of business costs, thus qualifying for ITC.

Ruling: CSR expenses are considered incurred "in the course of business" and are eligible for ITC under Section 16 of the CGST Act, 2017.

Issue 2: Restriction of ITC for Free Supply of Goods
The applicant supplies furniture, fittings, and electrical goods to schools as part of CSR activities free of cost. The question is whether these free supplies are restricted under Section 17(5)(h) of the CGST Act, 2017, which disallows ITC on goods disposed of by way of gift or free samples.

The ruling clarifies that the term "gift" implies a voluntary transfer without consideration, which is not the case for CSR activities mandated by law. The Hon'ble Supreme Court in Ku. Sonia Bhatia v. State of UP defined a gift as a voluntary transfer without consideration. Since CSR activities are obligatory and not voluntary, they do not qualify as gifts.

Ruling: Free supply of goods as part of CSR activities is not restricted under Section 17(5)(h) of the CGST Act, 2017, and ITC is available.

Issue 3: Restriction of ITC for Construction Activities
The applicant uses goods and services for constructing school buildings, which are not capitalized in the books of accounts. The question is whether ITC on these goods and services is restricted under Section 17(5)(c) and 17(5)(d) of the CGST Act, 2017.

Section 17(5)(c) and 17(5)(d) restrict ITC on works contract services and goods/services used for construction of immovable property to the extent of capitalization. The ruling refers to the Authority for Advance Ruling-Rajasthan in M/s. Rambagh Palace Hotels Pvt Ltd, which observed that ITC is not available for construction activities to the extent of capitalization.

Ruling: ITC on goods and services used for constructing school buildings is not available to the extent of capitalization.

Conclusion:
1. CSR expenses qualify as being incurred in the course of business and are eligible for ITC under Section 16 of the CGST Act, 2017.
2. Free supply of goods as part of CSR activities is not restricted under Section 17(5)(h) of the CGST Act, 2017.
3. ITC on goods and services used for construction of school buildings is not available to the extent of capitalization under Section 17(5)(c) and 17(5)(d) of the CGST Act, 2017.

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