2018 (9) TMI 247 - AT - Central Excise

CENVAT Credit - input service or not? - payment made to a third agency i.e. M/s. Shree Kalamadevi Charitable Trust for imparting training to students of underprivileged section of society in discharge of corporate social responsibility - Held that - CSR is not only a holistic approach but it has integrated the core business strategy since it addresses the wellbeing of all stake holders and not just companies shareholders - CSR is not a charity any more since it has got a direct bearing on the manufacturing activity of the company which is largely dependent on smooth supply of raw materials even from remote location or tribal belts (that requires no resistance in the supply chain from the community) and the same also augments the credit rating of the company as well as its standing in the corporate world. Whether CSR can be considered as input service and be included within the definition of activities relating to business ? - Held that - The answer is in the affirmative since to win the confidence of the stake holders and shareholders including the people affected by the supply of raw material from their locality say natural resources like mines and minerals etc. the hazardous emission that may result in production activities. Sustainability is dependent on CSR without which companies cannot operate smoothly for a long period as they are dependent on various stake holders to conduct business in an economically, socially and environmentally sustainable manner i.e. transparent and ethical - CSR which was a mandatory requirement for the public sector undertakings, has been made obligatory also for the private sector and 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. CSR activity being held as input service that was maintained by the appellant through an agency(Trust), the other dispute relating to suppression etc. that would attract extended period is not required to be discussed in the appeal, nor the part acceptance of the duty liability by the appellant. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Denial of Cenvat credit for CSR-related expenses.
2. Definition and scope of "input services" under Rule 2(l) of the Cenvat Credit Rules, 2004.
3. The nexus between CSR activities and business operations.
4. Compliance with statutory provisions and procedural requirements.
5. Applicability of judicial precedents.

Detailed Analysis:

1. Denial of Cenvat Credit for CSR-related Expenses:
The appellant challenged the denial of Cenvat credit amounting to ?12,12,772/- availed for CSR activities, specifically for training students from underprivileged sections of society through M/s. Shree Kalamadevi Charitable Trust. The department argued that CSR activities are welfare activities unrelated to business and, thus, do not qualify as input services under Rule 2(l) of the Cenvat Credit Rules, 2004.

2. Definition and Scope of "Input Services" under Rule 2(l) of the Cenvat Credit Rules, 2004:
The appellant contended that CSR activities fall within the ambit of "activities relating to business" as defined in Rule 2(l) of the Cenvat Credit Rules, 2004. They argued that the term "business" should be interpreted broadly to include activities that indirectly benefit the business, such as CSR. The department, however, maintained that CSR activities are charitable in nature and do not directly contribute to the manufacturing process.

3. The Nexus between CSR Activities and Business Operations:
The appellant argued that the training provided to students under CSR initiatives had a direct nexus with their business operations. The students were involved in activities like preparing data sheets, maintaining production log books, and assisting in production operations, which are integral to the manufacturing process. The department countered that the services were provided by the Trust and not directly by the appellant, and thus, the expenses were more in the nature of charity rather than business-related services.

4. Compliance with Statutory Provisions and Procedural Requirements:
The department pointed out that the CSR activities in question were carried out before the mandatory CSR provisions under Section 135 of the Companies Act, 2013, came into effect. They also argued that the reimbursement of expenses to the Trust did not comply with the procedural requirements for availing Cenvat credit, such as proper invoicing under Rule 9(2) of the Cenvat Credit Rules, 2004.

5. Applicability of Judicial Precedents:
The appellant cited various judicial decisions to support their claim that the definition of "business" includes activities that indirectly benefit the business. The department relied on precedents like Millipore India Pvt. Ltd. and Manikgarh Cement to argue that CSR activities do not qualify as input services. The Tribunal examined these precedents and found that CSR activities, being integral to the company's business strategy and sustainability, should be considered as input services.

Conclusion:
The Tribunal concluded that CSR activities are not merely charitable acts but are integral to the business strategy and sustainability of a company. They enhance the company's reputation, ensure smooth operations, and contribute to the well-being of stakeholders, including employees and the community. Therefore, CSR activities fall within the definition of "input services" under Rule 2(l) of the Cenvat Credit Rules, 2004. The Tribunal allowed the appeal, setting aside the order of the Commissioner (Appeals) and granting the appellant the claimed Cenvat credit.

Order:
The appeal is allowed, and the order passed by the Commissioner (Appeals) demanding duty, interest, and penalty against input service availed by the appellant company towards the fulfillment of CSR activity is hereby set aside.