The Uncertainty Encircling ITC Availment on Corporate Social Responsibility

Introduction

Although social responsibility as a concrete notion might be the product of the recent time, it has shared an interwoven colloquy with the business industry for a while now. While maximizing profit is the primary objective of a business entity and exercising autonomy towards its fulfillment is its substantive right, it nevertheless has several stakeholders to be accountable to. This accountability comes about in light of the impact it leaves on them and resultantly, the larger the entity, the bigger is the impact. The public, the society and the environment, inter alia, are stakeholders, towards which a sizable corporate entity owes certain responsibilities in terms of providing prosperity and welfare and that is by and large referred to as Corporate Social Responsibility (CSR). This concept was integrated into the Indian legal system via the Companies Bill, 2009, in order to ensure that corporate entities contribute meaningfully towards the growth and prosperity of the nation.

Section 135 of the Companies Act, 2013 requires every company having a specified net worth or turnover or profit, to contribute at least two per cent of its average net profit towards satisfying its corporate social responsibility. Further, Schedule VII of the Act and the Companies (Corporate Social Responsibility) Rules, 2014 provide for certain conditions and guidelines which are geared towards advancing CSR objectives. This stipulation inter alia relates to activities ranging from eradicating extreme hunger and poverty to imparting employment enhancing vocational skills and promoting gender equality.

Now, a seemingly benevolent and rather edifying provision becomes convoluting once a mandate is attached to it and tax implications flow subsequently. The challenge being faced by the taxpayers in indirect taxation realms is with respect to eligibility of availing Input Tax Credit (ITC) on these transactions.

Section 16(1) of the CGST Act provides that a registered person is eligible to avail the credit of goods or services supplied to it and used by it in the course or furtherance of business. Further, according to Section 17(5) of the CGST Act, input tax credit is not available in respect of supplies listed therein, notwithstanding anything contained in Section 16(1) of the CGST Act. Therefore, for availing ITC under the GST regime it is pertinent that the particular supply must be used in the course or furtherance of the business and should not be specifically bared by Section 17(5) of the CGST Act.

Whether CSR expenditure is in the course or furtherance of business

CSR activities are a part of the commercial transactions of a corporation, wherein the entity provides certain contributions and earns goodwill, which is crucial part of any corporate undertaking. Moreover, they have to be carried out by certain companies, in absence of which, they can face repercussions. CSR therefore facilitates the furtherance of a business by being a valuable but also imperative input.

In Asstt. CIT v. Jindal Power Ltd. [2016] 70 taxmann.com 389 (Raipur – Tri.), the issue for examination before the tribunal was allowability of expenditure incurred in discharge of corporate social responsibility on voluntary basis. The assessee had incurred voluntary expenses on construction of school building, devasthan/ temple, drainage, barbed wire fencing, educational schemes and distributions of clothes etc. It was held that the expenses would be allowed as long as they are incurred under section 37(1) of the Income Tax Act, 1961 are incurred wholly and exclusively as required, for the purposes of earning the income from business or profession.

Further, the Hon’ble Madras High Court in the case of CIT v. Madras Refineries Ltd. [2004] 138 Taxman 261/266 ITR 170 has upheld deductibility of the amount spent by the assessee even on bringing drinking water to locality and in aiding local school. It was held that charitable activities which bring goodwill are in respect of business.

The above judgments examined the claim of expenditure under section 37 of the Income Tax Act, 1961. In the case of Jindal Power Ltd. (supra) the revenue had contested that in view of the explanation 2 to section 37(1) the CSR contribution cannot be allowed. The courts have held that the said explanation is merely prospective and applies only to obligatory CSR contributions and not to voluntary contributions.

In authors view, a provision under Income Tax Law would apply only for examining the eligibility to claim expenditure under that law only. Similar restrictions cannot be made applicable under GST Law in the absence of any specific restriction in respect of CSR contributions vide specific provision in this regard.

Further, one of the most pertinent cases in reference to this is the case of Essel Propack Ltd. v. Commissioner of CGST¹ wherein the Bombay High Court held that CSR Activities are input service for the purpose of availing CENVAT Credit after considering the mandatory requirement of CSR under Companies Act, 2013 and other direct & indirect advantages which the Corporate derives by discharging CSR. Allowing CENVAT credit in respect of CSR expenditure, this decision has paved way for steering further litigation on this subject. By the same token, AAR Uttar Pradesh has recently held CSR activity to be used in the course or furtherance of business. The companies which meet the criteria for CSR have to mandatorily undertake CSR activities and it therefore forms a part of the business itself. Taking this into consideration, the Authority concluded that ITC in terms of Section 16, CGST Act, is to be allowed on such transactions.²

Thus, in the authors view undertaking CSR activities is certainly a business endeavor in as much as it arises from a legal mandate.

Deconstructing the nature of CSR vis a vis Section 17(5) of CGST Act

Fulfilling Corporate Social Responsibility can take two ways and means, viz. availing services and availing goods.

ITC on goods purchased for fulfilling CSR obligations

CSR can also be undertaken by endowing goods. In our view, the ITC on such goods should also be available unless there is a specific bar under Section 17(5) of the CGST Act. Many a times taxpayers also wonder if they will be barred to take ITC of the goods altogether for CSR purpose as Section 17(5) inter-alia debars ITC when goods written off or disposed of by way of gift or free samples. In this regard, light needs to be cast on the term “gift or free samples” as distributing goods under CSR can be misidentified with the same by reason of a unilateral nature.

Meaning of a gift

Section 122 of the Transfer of Property Act, 1882, defines “gift” as follows:

“the transfer of certain existing moveable or immoveable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee.”

Attention is invited to the expression “voluntarily” which conveys that the very nature of a gift is wilful, uncompelling and self-induced. Moreover, the Gift-Tax Act, 1958, has defined the word gift to mean transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money’s worth. The definition of this term has also been cited by the Hon’ble Supreme Court as a voluntary transfer of property and as a gratuity and an act of generosity.³Besides, the Madras High Court also held that a transaction undertaken due to compulsion or enforcement does not amount to a ‘gift’ within the meaning of S. 122, TOPA. And worth to mention the Bombay High Court’s observation, that the essence of gift thus is a voluntary transfer. Further, the term “voluntarily” means without compulsion, freely and uninfluenced by pressure.⁴

In light of the above, it can be seen that the voluntary nature of a gift is recognized in several legal authorities and this disposition runs contrary to the substance of a CSR, which essentially arises out of a legal mandate and not voluntarily. The Allahabad High Court perceived this term as “a person doing an act/acts of his own volition and knows the nature of his acts and does not act in performance of a legal duty, not due to coercion or fraud or misrepresentation or mistake.”

Meaning of an obligation

Unlike the term suggests, Corporate Social Responsibility is more than a mere responsibility and is admittedly in the nature of an obligation. Indeed, the role of a large enterprise due to its statute and influence should ideally not be limited to generating profit but should also entail a responsibility towards the society and public at large. However, mandating such responsibility takes it a step further from ‘duty’ and makes it an obligation or a liability.

Drawing a line of distinction between the two terms, the Patna High Court observed that it is one thing to say that one has a duty, but a legal obligation is a different thing.⁵ “Obligation” means a duty or a liability arising in law or from contract and liability itself means subjection to a legal obligation.⁶ The Calcutta High Court held that the word ‘obligation’ implies not a moral duty, but a legal duty which can be enforced by law and which is imposed upon a person by an outside agency or a third party in respect of the subject-matter.⁷ And very importantly, it was stated by CESTAT, New Delhi, that the expenditure on Corporate Social Responsibility is a statutory requirement under the Companies Act.⁸

A perusal of these judicial pronouncements reveals that an obligation does not entail a voluntary action, but a mandatory one and undertaking CSR activities is a mandate by the statute, thereby making it an obligation and clearly discerning the difference between goods given under CSR and gifts distributed otherwise.

Thus, in authors view, it is possible to take a view that availing ITC on above CSR activities is not restricted by law as it does not come under the expanse of Section 17(5) of CGST Act. Therefore, utilizing ITC in respect of expenditure incurred for fulfilling CSR obligation should justifiably be allowed, taking into consideration the surrounding facts and circumstances of each case. However, the same is likely to be disputed by the department and shall be settled at higher forum only.

ITC on services availed for fulfilling CSR obligations

In authors view, the credit would be available in respect of all services which are not covered under Section 17(5) of CGST Act 2017. To illustrate – If a company is making certain houses for persons belonging to economically backward classes and availing works contract/construction services for the same, the ITC on such services will not be available since there is a specific bar on availing ITC of such services by a person who is not engaged in further supply of such services.

Concluding Comments

Amidst the hue and cry subsequent to the roll out of GST, the provision for availing ITC was the pacifier. The seamless procedure for utilizing input credit has been lauded, however, it is not free of its own convolutions. There is ambiguity surrounding the availment of ITC with respect to certain transactions owing to the obscurity of their true nature and in some cases, the different treatment of similar activities. As far as CSR is concerned, taking into account it’s essence and the relevant jurisprudence, it will only be fair to allow ITC claims on the same. CSR activities bear a nexus with the business and are performed out of the its net profits itself. Moreover, their obligatory nature further stresses the need to allow the same as they are a mandatory expenditure in the books of the companies. Making this mandatory and not permitting to take ITC on the same would go against the tenet of equity. Therefore, all things considered, availing ITC on CSR expenditure (unless barred by Section 17(5) of the CGST Act) should be within the accepted bounds of law.

Authored by Tushar Aggarwal (CA | Founder Partner, Tattvam Advisors)

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1. Essel Propack Ltd. v. Commissioner of CGST [2020] 117 taxmann.com 409 (Mum. – CESTAT).
2. Dwarikesh Sugar Industries Ltd., In re [2021] 125 taxmann.com 329 (AAR – Uttar Pradesh)
3. Ku. Sonia Bhatia v. State of U.P. [1981] 3 SCR 239.
4. Laxman v. CIT [1989] 42 Taxman 47/[1988] 174 ITR 465 (Bom.); Sholapur Spg. & Wvg. Co. Ltd. v. Pandharinath Martand Sulakhe [1928] 30 Bom LR 893.
5. Mahanth Girjanand Bhagat v. Bhagwan Bhagat AIR 1967 Pat 101.
6. Punjab National Bank Ltd. v. Union of India [1986] 59 Comp. Cas 35 (Delhi).
7. State of West Bengal v. Iswar Damodar Jew AIR 1976 Cal 46.
8. Northern Coalfields Ltd. v. Commissioner of GST, Customs & Central Excise [Excise Appeal No. 51442 of 2018, dated 20-11-2019]