#GSTCase-76-No Input Tax Credit on goods distributed Free of Cost by way of CSR Activity (AAR Kerala)
CA Arpit Haldia
Polycab Wires (P.) Ltd.  104 taxmann.com 36 (AAR – KERALA)
Query 1: Whether distributors are entitled for input tax credit on goods supplied to Kerala State Electricity Board on instructions from the applicant?
Query 2: Whether Input Tax Credit is available on CSR expenses.
Applicant is a dealer in electrical goods, cables of all kinds including winding wires, pipes etc. As part of their CSR Activity, they had supplied electrical goods free of cost in two ways:
Scenario 1: Applicant had supplied electrical items free of cost to Kerala State Electricity Board through their distributors spread across the State in connection with reinstating connectivity in the flood ridden areas as part of the “mission reconnect”.
In this Scenario, applicant instructed distributors to provide goods to Kerala State Electricity Board. The distributors billed the goods to Kerala State Electricity Board and paid GST to Government. In the invoices so issued to Kerala State Electricity Board, distributors had shown sale value, GST and total amount with 100% discount. Therefore, although entire tax was paid by the distributors but they did not recover anything from Kerala State Electricity Board. However, in turn distributors were to raise claim to the applicant who would reimburse value to the distributors.
Scenario 2: In addition to this supply to Kerala State Electricity Board, the applicant themselves had distributed electrical items like, switches, fan, cables etc. to flood affected people under CSR expenses on free basis without collecting any money.
- Observation by AAR
Query 1: The distributors billed the goods to Kerala State Electricity Board and paid GST to Government. In the invoice so issued, the distributor had valued the goods for the purpose of tax and value was shown as discount. Therefore, they would be entitled for input tax credit on the goods supplied to Kerala State Electricity Board on instructions from the applicant.
Query 2: As per Sec. 17(5)(h), input tax credit shall not be available in respect of goods lost, stolen, destroyed, written off or disposed by way of gift or free samples. In this case after availing input tax credit, the applicant disposed goods as free supply for CSR activities, Hence, the applicant is liable to reverse the input tax credit already availed.
Query 1: Distributors would be entitled for input tax credit on the goods supplied to Kerala State Electricity Board on instructions from the applicant.
Query 2: Applicant is liable to reverse the input tax credit already availed on goods distributed directly by them to flood affected people under CSR expenses on free basis without collecting any money.
AAR has held that no Input Tax Credit would be allowed to the applicants on the goods distributed free of cost to the flood affected people by way of CSR Activity. CSR Activity has become a taxing activity for the Corporates. On one hand they are mandatorily required to carry out CSR Activity and on the other hand they are denied Input Tax Credit treating it as a supply without consideration and not in the course or furtherance of business.
However, in the matter of Essel Propack Ltd. Vs Commissioner of CGST, Bhiwandi (CESTAT Mumbai), issue before CESTAT was
“To pin point the dispute, it is now to be looked into as to if CSR can be considered as input service and be included within the definition of “activities relating to business” and if in so doing, a company’s image before corporate world is enhanced so as to increase its credit rating as found from the handbook of CSR activities discussed above.”
In Para 11 of the Judgement, CESTAT observed 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.
In Para 11.1 CESTAT observed that
Therefore, 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 ethical. Hence in my considered view, 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.
CESTAT finally held that
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 fulfilment of CSR activity is hereby set aside.
CESTAT in the above decision has considered CSR as an input service and within the “activities relating to business”. Further under the Income Tax Act as well, to clarify non-deductibility of CSR Expenditure, the Finance (No.2) Act, 2014 has inserted an Explanation to section 37 which is reproduced as under:
“Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.”
Therefore, a specific explanation was inserted vide Finance Act, 2014 to clarify the issue. Prior to that both views were prevalent regarding allowability and non-allowability of the expenditure under CSR.
Conclusion: Although no such specific denial exists in GST but applicability of Section 17(5)(h) cannot be entirely denied. The case of blocked credit on account of provision of Section 17(5)(h) is more sound because even though CSR expenditure might be incurred on account of business expediency and might satisfy conditions provided under Section 16(1) of CGST Act but then it does not entail any contractual obligation with recipient and falls under the ambit of free distribution, therefore its credit is blocked vide provisions of Section 17(5)(h) of CGST Act, 2017. But then if the case can be made out that the contractual obligation is not with the person to whom goods are supplied free of cost but with the Government who has granted the approval to run the company subject to CSR Activity, then alternate views might be possible and applicability of Section 17(5)(h) could be avoided.
It seems until a specific clarity is brought in this regard, bone of contention would continue.