Companies can avail Cenvat Credit on CSR Expenses: CESTAT [Read Order]

The Mumbai bench of the Customs Excise & Service Tax Appellate Tribunal ( CESTAT ) has held that a Company is eligible for the Cenvat Credit in respect of the payments made towards the fulfilment of its activities related to Corporate Social Responsibility ( CSR ).

The department denied Cenvat credit to the appellant- company against the 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 the discharge of corporate social responsibility.

The department was of the view that such input service did not fall under the definition of input services given in Rule 2(l) of Cenvat Credit Rules 2004 for the manufacture of appellant’s final product.

Before the tribunal, the appellant contended that they had engaged youth from the lower strata of the society in its factory in preparation of data sheet, maintenance of production log book, preventive maintenance of the machine and assist in production operation as well as transfer of raw materials etc. according to them, the intention was to provide them on the floor exposure to the production activities of the company. It was argued that the same is included in the manufacturing activities besides the fact that the purpose was to discharge CSR obligations.

The Tribunal, while allowing the appeal of the Company said that “To pinpoint 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 the corporate world is enhanced so as to increase its credit rating as found in the handbook of CSR activities discussed above. The answer is in the affirmative since to win the confidence of the stakeholders 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.”

The Tribunal 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.

The Tribunal also set aside interest and penalty against input service availed by the appellant company towards the fulfilment of CSR activity.

While speaking to Taxscan, Abhishek A Rastogi, Partner with Khaitan & Co said that, “This is a welcome decision from the Mumbai Tribunal and significantly broadens the horizon of the term ‘input service’. While the decision may be relevant for period prior to 1st April 2011, for subsequent period, the decision may not hold much relevance as the definition of input service got amended to drop the term ‘activities relating to business’. This creates a challenge as authorities are inclined to distinguish favourable decisions and deny credits on plethora of services claiming such services are covered under the ambit of ‘activities relating to business’ which have been removed from 1 April 2011. It will be interesting to see if courts can take a similar liberal approach vis-à-vis credits on services post 1 April 2011, especially when the term ‘Input Tax Credit’ gets an extremely wide amplitude under GST.” Said Abhishek A Rastogi, Partner at Khaitan & Co. who has handled multiple such cases with success, for both pre and post 1 April 2011 periods.

Sindhu Mangat, Advocate in Swamy Associates said that, The order regarding eligibility of credit on input services used of discharging Corporate Social Responsibility (CSR) is  based  on wide interpretation of concept of ‘business’ in modern times. While allowing credit on CSR activities, it has been held that unless CSR is treated as input service in respect of activities relating to business, production and sustainability of the company itself would be at stake.

Even under GST, credit on CSR activities has been a grey area. However, with broadest definition of input service under GST (Section 2 (60) “input service” means any service used or intended to be used by a supplier in the course or furtherance of business), the CESTAT order can be relied on  in support of eligibility of credit on CSR activities. CSR activities can be linked to following clause in definition of business to claim that credit is eligible under GST.

Section 2 (17 )(b) any activity or transaction in connection with or incidental or ancillary to any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit.

Anita Rastogi, Indirect Tax Partner with PwC said that “Purposive interpretation should be adhered to while interpreting any legal provision and clearly this ruling is an example of this concept.

CSR is an input service and falls within the expression ” activities relating to business”. Although CSR has an element of charity but it goes beyond that. This case pertains to period prior to CSR being made mandatory under Companies Act. Overall a very good ruling which can be relied upon surely for the period post-April 2014 when CSR activities were mandated under the Companies Act. A similar interpretation can be taken under GST regime as well since the definition of input service means service used in the course or furtherance of the business”.