2020(01)LCX0257(AAR)
AAR-UTTAR PRADESH
M/s Dwarikesh Sugar Industries Limited
decided on 22/01/2020
AUTHORITY FOR ADVANCE
RULING-UTTAR PRADESH
4, Vibhuti Khand, Gomti Nagar, Lucknow
PROCEEDING OF THE AUTHORITY FOR
RULINGS U/S. 98 OF
THE GOODS AND SERVICES TAX ACT, 2017
Sub:- GST ACT, 2017 – Advance Ruling U/s 98 – liability to tax under GST Act in respect to application dated 24.09.2019 of M/s Dwarikesh Sugar Industries Limited, P.O.- Medpurasultan, Najibabad, Nagina Road, Bundki, Bijnor, Uttar Pradesh – Order- Reg.
1) M/s Dwarikesh Sugar Industries
Limited, P.O.- Medpurasultan, Najibabad, Nagina Road, Bundki, Bijnor, Uttar
Pradesh- 246 762 (here in after called the applicant) is a registered assessee
under GST having GSTIN: 09AABCD8192N1ZO.
2) The applicant is a company incorporated under the Companies Act, 2013 and
engaged in the business of manufacture and sale of sugar and allied products. In
order to comply with the Corporate Social Responsibility (CSR) in terms of
Section 135 of the Companies Act, the applicant undertakes following activities:
Construction of school building, additional rooms, laboratories, etc.;
Free supply of furniture / fittings such as tables, chairs etc., to be used in the school;
Free supply of electrical goods for use in school; and
Other expenses such as provision of goods / services to Registered Charitable Trusts / NGO’s
In order to undertake the above-mentioned CSR activities, the applicant procures various goods and services on which GST is charged by the supplier.
3). Accordingly, following
questions have been posted by the applicant, in his application dated 24.09.2019
(application completed in all aspect received by the Authority on 25.10.2019),
before the Authority: –
i. Whether expenses incurred by the Company in order to comply with requirements
of Corporate Social Responsibility (CSR) under the Companies Act, 2013 (`CSR
Expenses’) qualify as being incurred in the course of business and eligible for
input tax credit (`ITC’) in terms of the Section 16 of the Central Goods and
Services Tax Act, 2017 (`CGST Act, 2017′)?
ii. Whether ITC in relation to CSR activities which have been obligated under a
law are restricted under Section 17 (5) of CGST Act, 2017? If yes,
a. Whether free supply of goods as a part of CSR activities is restricted under
Section 17 (5) (h) of CGST Act, 2017?
b. 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)
/ 17 (5) (d) of CGST Act, 2017?
4). The applicant further submitted that :-
i. “In the course of business” includes all activities which are incidental /
ancillary to the business which are incurred during the course of business. Any
activity which needs to be incurred as a part of some process in a business is
to be treated as “in the course of business”. A Company is compulsorily required
to undertake CSR activities in order to run its business. As a result, they
become an essential part of the business process as a whole and thus are treated
to be incurred “in the course of business”.
ii. Considering the wide definition of the term ‘business’, there is no
requirement to establish a direct one to one linkage in order to avail ITC. Even
incidental / ancillary activities are treated as ‘in the course of business’ and
procurements made for undertaking such activities are eligible for ITC.
iii. CSR activities undertaken by them to comply with the requirements of
Companies Act, 2013 are incurred in the course of business. Since these
activities are incurred in the course of business, they are eligible for ITC in
terms of the provisions of CGST Act, 2017.
iv. CSR expenses are incurred for the purpose of business / in the course of
business however its actual benefits are reaped by the intended recipients and
not by the Company (for its own personal use). Since the benefits are rendered
to the society and not the Company, restrictions under Section 17 (5) does not
apply.
v. 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,
it is hereby submitted that these expenses do not qualify as ‘gifts’ and
therefore its credit is not restricted under Section 17(5).
vi. Since CSR credit is not restricted under Section 17 (5) of CGST Act, 2017,
the same is eligible for ITC.
5). The application for advance ruling was forwarded to the Jurisdictional GST
Officer to offer his comments/views/verification report in the matter, which was
received in this office vide letter C. No. V(30)Div-Bij/Misc/60/18-19/10 dated
02.01.2020, wherein it has been reported that on the basis of restrictive
provisions under Section 17(5)(c d), ITC in respect of inward supplies of goods
86 Services for construction of school building, furniture and electrical
fittings for school building, is not available to the applicant irrespective of
activities being carried out for corporate social responsibilities.
6) The applicant was granted a personal hearing on 21.01.2020. Shri Manoj
Agarwal, Chief Manager (Taxation) and Sh. K. Sivarajan, Chartered Accountant,
Authorized representatives of the applicant, appeared for hearing on the given
date.
During the personal hearing, they reiterated the submissions already made vide
their advance ruling application dated 24th September and submitted details of
some case laws in the matter.
DISCUSSION AND FINDING
7) At the outset, we
would like to make it clear that the provisions of both the CGST Act and the
UPGST Act are the same except for certain provisions. Therefore, unless a
mention is specifically made to such dissimilar provisions, a reference to the
CGST Act would also mean a reference to the same provision under the UPGST Act.
Further to the earlier, henceforth for the purposes of this Advance Ruling, a
reference to such a similar provision under the CGST Act / UPGST Act would be
mentioned as being under the `CGST Act’ 2017.
8) We have gone through the submissions made by the applicant and have examined
the explanation submitted by them. At the outset, we find that the issue raised
in the application is squarely covered under Section 97(2)(d) of the CGST Act
2017 being a matter related to admissibility of input tax credit of tax paid or
deemed to have been paid. We therefore, admit the application for consideration
on merits.
9) We have gone through the submissions made by the applicant and have examined
the explanation submitted by them. Section 16(1) of the CGST Act, 2017 defines
the eligibility for taking input tax credit, which is as sunder:-
“16 (1) – Every registered person shall, subject to such conditions and
restrictions as may be prescribed and in the manner specified in Section 49, be
entitled to take credit of input tax charged on any supply of goods or services
or both to him which are used or intended to be used in the course or
furtherance of his business and the said amount shall be credited to the
electronic credit ledger of such person”
Further, the term “Business”, as defined under Section 2(17) of the CGST Act,
2017, includes:-
(a) any trade, commerce, manufacture, profession, vocation, adventure, wager
or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any activity or transaction in connection with or incidental or ancillary to
sub-clause (a);
(c) any activity or transaction in the nature of sub-clause (a), whether or not
there is volume, frequency, continuity or regularity of such transaction;
(d) supply or acquisition of goods including capital goods and services in
connection with commencement or closure of business;
(e) provision by a club, association, society, or any such body (for a
subscription or any other consideration) of the facilities or benefits to its
members;
(f) admission, for a consideration, of persons to any premises;
(g) services supplied by a person as the holder of an office which has been
accepted by him in the course or furtherance of his trade, profession or
vocation;
(h) services provided by a race club by way of totalisator or a licence to book
maker in such club ; and
(i) any activity or transaction undertaken by the Central Government, a State
Government or any local authority in which they are engaged as public
authorities”.
10) As per Section 135 (1) of Companies Act, 2013, “Every company having net
worth of rupees five hundred crore or more, or turnover of rupees one thousand
crore or more or a net profit of rupees five crore or more during the
immediately preceding financial year shall constitute a Corporate Social
Responsibility Committee of the Board consisting of three or more directors, out
of which at least one director shall be an independent director.”
And as per Sub Section (5) of the Section 135 of the Companies Act, 2013,
“The Board of every company referred to in sub-section (1), shall ensure that
the company spends, in every financial year, at least two per cent of the
average net profits of the company made during the three immediately preceding
financial years or where the company has not completed the period of three
financial years since its incorporation, during such immediately preceding
financial years, in pursuance of its Corporate Social Responsibility Policy”.
Further Sub Section (7) of the Section 135 of the Companies Act, 2013, specifies
that “If a company contravenes the provisions of sub-section (5) or
sub-section (6), the company shall be punishable with fine which shall not be
less than fifty thousand rupees but which may extend to twenty-five lakh rupees
and every officer of such company who is in default shall be punishable with
imprisonment for a term which may extend to three years or with fine which shall
not be less than fifty thousand rupees but which may extend to five lakh rupees,
or with both”.
Accordingly we observe that any Company, who meets the criteria for CSR, is
mandatorily required to incur in CSR activities to be in compliant with the
Companies Act, 2013 and non-compliance of these provisions may lead to business
disruptions.
11) Now coming to the question whether CSR activity is to be considered “used or
intended to be used in the course or furtherance of business”, we observe that
Hon’ble CESTAT Mumbai, in the case of M/s Essel Propack Ltd. Vs. Commissioner of
CGST, Bhiwandi {2018(362) E.L.T. 833 (Tri.-Mumbai)}, has observed that :-
“CSR not only holistic approach but integrating core business strategy since
same address well being of all stake holders and not just company’s
shareholders, also CSR not charity as same having direct bearing on
manufacturing activity of company that is largely dependent on smooth supply of
raw materials- CSR also augmenting credit rating of company as well as its
standing in corporate world-Hence, sustainability of company dependent on CSR
without which companies cannot operate smoothly for long period as they are
dependent on various stakeholders to conduct business in economically, socially
and environmentally sustainable manner”.
Hon’ble Tribunal has further observed that “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.”
12). Further, Hon’ble High Court of Karnataka, in its judgment, in the case of
M/s Commissioner of Central Excise, Bangalore Vs. Millipore India (P) Ltd., has
observed that, “… now the concept of corporate social responsibility is also
relevant. It is to discharge a statutory obligation, when the employer spends
money to maintain their factory premises in an eco-friendly, manner, certainly,
the tax paid on such services would form part of the costs of the final
products, Tribunal was right in holding that the service tax paid in all these
cases would fall within the input services and the assessee is entitled to the
benefit thereof..”
In view of this, 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”.
13) As regard to the question whether free supply of goods as a part of CSR
activities is restricted under Section 17 (5) (h) of CGST Act, 2017, we observe
that the applicant supplies of furnitures / fittings such as tables, chairs etc.
and electrical goods to be used in the school under the CSR activity, free of
cost. In this regard, we observe that Section 17 of the CGST Act, 2017 talks
about apportionment of credit and blocked credits. Further, as per Section
17(5)(h) of the CGST Act, 2017, input tax credit shall not be available in
respect of “goods lost, stolen, destroyed, written off or disposed of by way
of gift or free samples.” The aforesaid 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. Further, the applicant
has also relied upon the Judgment of Hon’ble Supreme Court of India, in the case
of Ku. Sonia Bhatia v. State of UP, wherein Hon’ble Court has cited the
definition of ‘gift’ from Corpus Juris Secundum, Volume 38 in the following
words: “A ‘gift’ is commonly defined as a voluntary transfer of property by one
to another, without any consideration or compensation therefor. A ‘gift’ is a
gratuity and an act of generosity and not only does not require a consideration,
but there can be none.” Citing the definition, it has been observed by the
Hon’ble Court that “The concept of gift is diametrically opposed to the presence
of any consideration or compensation. A gift has aptly been described as a
gratuity and an act of generosity and stress has been laid on the fact that if
there is any consideration then the transaction cease to be a gift.”
In view of above discussion, we are in unison with the applicant that 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, we are of
the opinion that they do not qualify as ‘gifts’ and therefore its credit is not
restricted under Section 17(5) of the CGST Act, 2017.
14). As regard to the second question of the applicant that 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) / 17 (5) (d) of
CGST Act, 2017, we observe that Section 17 (5) ( c) and 17 (5) (d) of CGST Act,
2017 has restricted the credit on construction/Work Contract services, which is
as under:-
(c) works contract services when supplied for construction of an immovable
property (other than plant and machinery) except where it is an input service
for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction of
an immovable property (other than plant or machinery) on his own account
including when such goods or services or both are used in the course or
furtherance of business.
Explanation.—For the purposes of clauses (c) and (d), the expression
“construction” includes re-construction, renovation, additions or alterations or
repairs, to the extent of capitalisation, to the said immovable property;
15) In this regard we observe that the Authority for Advance Ruling-Rajasthan,
in the case of M/s Rambagh Palace Hotels Pvt Ltd, has observed that, “In view of
above facts, we find that, input tax credit in general is not available for
construction, reconstruction, renovation, addition, alteration or repair of an
immovable property even when such goods or services or both are used in course
or furtherance of business. However, the limitation in such a scenario is extent
of capitalization.” Observing this the Authority, on the question whether GST
paid on building material meant for repair of building and labour supply for
carrying out repair of building shall be available for ITC, has ruled that “ITC
will not be available to the extent of capitalization of building material /GST
on labour supply.
From the above discussion we are of the opinion that the 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. Accordingly, we observe
that the ITC of goods and services used for construction of school building will
not be available to the applicant to the extent of capitalisation.
16) In view of the above discussions, we, both the members unanimously rule as
under;
RULING
Question 1:-
Whether expenses incurred by the Company in order to comply with requirements of
Corporate Social Responsibility (CSR) under the Companies Act, 2013 (`CSR
Expenses’) qualify as being incurred in the course of business and eligible for
input tax credit (`ITC’) in terms of the Section 16 of the Central Goods and
Services Tax Act, 2017 (`CGST Act, 2017′)?
Answer:- Yes.
Question 2:- Whether free supply of goods as a part of CSR activities is
restricted under Section 17 (5) (h) of CGST Act, 2017?
Answer:- No
Question 3:- 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) / 17 (5) (d) of CGST Act, 2017 ?
Answer:- ITC is not available to the extent of capitalisation.
17) This ruling is valid subject to the provisions under Section 103(2) until
and unless declared void under Section 104(1) of the CGST Act, 2017.
(Ajay Kumar Misra)
Member of Authority for Advance Ruling
(Dinesh Kumar Verma)
Member of Authority for Advance Ruling
To,
M/s Dwarikesh Sugar Industries Limited,
P.O.- Medpurasultan, Najibabad,
Nagina Road, Bundki,
Bijnor, Uttar Pradesh- 246 762
AUTHORITY FOR ADVANCE RULING-UTTAR PRADESH
Order No. 52
Date: 22.01.2020
Copy to-
1. The Chief Commissioner, CGST & Central Excise,
Lucknow, Member, Appellate Authority of Advance Ruling.
2. The Commissioner, Commercial Tax, Uttar Pradesh, Member, Appellate Authority
of Advance Ruling.
3. The Commissioner, CGST & CX, Meerut, Uttar
Pradesh.
4. The Assistant Commissioner, CGST & Central Excise, Division-Bijnor, Chandna
Bhawan, Dayal Kunj, Kiratpur Road, Bijnor, Uttar Pradesh.
5. Through the Additional Commissioner Grade-I, Commercial Tax, Moradabad, Uttar Pradesh
to jurisdictional tax assessing officers.
Note: An Appeal against this advance ruling order lies before the Uttar Pradesh Appellate Authority for Advance Ruling for Goods and Service Tax, 4, Vibhuti Khnad, Gomti Nagar, Lucknow-226010, within 30 days from the date of service of this order.
Equivalent .