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November 1, 2020

CSR be considered as Input service and is eligible for Cenvat Credit

by CA Shivam Jaiswal in Legal Court Judgement

CSR be considered as Input service and is eligible for Cenvat Credit

Corporate Social Responsibility is a concept whereby companies integrate social and environmental concerns in their business operations. The Companies Act, 2013 has formulated Section 135 and the Companies (Corporate Social Responsibility) Rules, 2014 which prescribes mandatory provisions for Companies to fulfil their CSR. Section 135(5) of the Companies Act, 2013 states that CSR expenditure in every fiscal year, should amount of minimum 2% of the average net-profits of the company made during 3 instantly before financial years, in achievement of CSR policy.

Let us refer to the case of Essel Propack Ltd. Vs Commissioner of CGST, Bhiwandi (CESTAT Mumbai) were the primary issue was the denial of cenvat credit to the appellant against payment made to a third agency i.e. M/s. Shree Kalamadevi Charitable Trust for imparting training to students of under- privileged section of society in discharge of corporate social responsibility is challenged before this Tribunal.

Facts of the Case:

  • The appellant Essel Propack Ltd manufactured multi-layer plastic laminates and was availing cenvat credit facility under the Cenvat Credit Rules 2004.
  • Audit was conducted in the factory and it was detected that cenvat credit of service tax was availed towards such company’s commitment to CSR and audit pointed out the same to be inadmissible.
  • Appellant was put to notice on the ground that such input service did not fall under the definition of input services given in Rule 2(l) of Cenvat Credit Rules 2004 for manufacture of appellant’s final product.
  • Upon reply, matter was adjudicated upon and holding the same to be inadmissible, Adjudicating Authority also had imposed interest and penalty on the appellant that was confirmed by the Commissioner (Appeals) GST & CE.

Submissions by Appellant before CESTAT

  • Appellant submitted that the said expenditure was incurred by the company which was covered under the activities relating to business as provided under the definition of input services given in Rule 2(l) of the Cenvat Credit Rules 2004.
  • The services of students were utilised in relation to manufacturing business of the appellant since they were assigned duties to prepare data sheet, maintain production log book, support preventive maintenance of machines, and assist production operators and in the process.
  • They learned the nature of job that made them eligible to become future workers in factories.
  • It was also pointed out that the concept of business was not static and over the period of time, the expression involved complete care and concern for the society at large and the people of the locality in which business was located in particular.
  • The term activities relating to business was of wider ramification and CSR was within its ambit that would cover rule 2(1) of the Cenvat Credit Rules.

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Submissions by Respondent before CESTAT

  • The department submitted that there was no nexus of input services with the business activity of the appellant since CSR activities were welfare activities and not related to business/ production related activities.
  • He further submitted that the service of imparting training was provided by the trust M/s. Shree Kalamadevi Charitable Trust to the students of the weaker section of society and not by the appellant company itself and therefore there was no service provided by the Trust against which cenvat credit could be claimed by the appellant.
  • Further, the appellant bifurcated the service input in three parts namely i) Canteen service ii) Supervision of students iii) Consultation and overall development of students.
  • Those services were received by the M/s. Shree Kalamadevi Charitable Trust from various tenders against which reimbursement of expenses were claimed by the trust and the same was reimbursed that would not fulfil the requirement of input service availed by the appellant.
  • It was also pointed out that Section 135 of the Companies Act effective from 01.04.2014 on mandatory CSR activities to be discharged by the company pertained to the period not covered under the period of dispute and therefore the contention of the appellant that such obligation of CSR activity was discharged in compliance to statutory obligation was not to be accepted.

Observations of CESTAT on various definitions of CSR

  • The World Bank CST defined CSR as the continuing commitment by business to contribute to economic development while meeting the quality of life in the work place and their family as well as of the community and society at large.
  • United Nations IDO also defined it as a management concept whereby companies integrated social and environmental concerns in their business operations and interaction with stakeholders.
  • Therefore, CSR was generally understood as being the way through which the company achieves a balance of economic, environmental and social imperatives (triple bottom line approach), while at the same time it addressed the expectations of stake holders and shareholders.
  • UNIDO further elaborated it that it was important to draw a distinction between CSR, which can be a strategic business management, and charity, sponsorship or philanthropy.
  • Even though the latter could also make a valuable contribution to poverty deduction, CSR would directly enhance reputation of a company and strengthens its brand. The concept of CSR clearly went beyond charity.
  • Therefore, it was clear that CSR was not only a holistic approach but it had integrated the core business strategy since it addressed the wellbeing of all stake holders and not just the shareholders.
  • The Handbook on CSR published by the Confederation of Indian Industry (CII) emphasises the usefulness or benefit of robust CSR programme and among the important outcomes, it stresses importance on the following components:
    1. Community’s participation provides the licence to operate companies as government licenses would not suffice such smooth operation.
    2. It attracts and boosts employees and encourages them to participate by enhancing employees moral that they all belong to the company.
    3. Companies have invested in CSR to enhance community livelihood by incorporating them in their supply chain. This has not only benefited communities and increased their in complacency but has provided the company with additional or secure supply of raw material.
    4. It enhances the reputation of company, its goodwill by creating a positive image and branding benefits that continue to exist for companies who operate CSR programmes.
  • This would indicate that CSR was not a charity any more since it had got a direct bearing on the manufacturing activity of the company which was 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 augmented the credit rating of the company as well as its standing in the corporate world.

Observations of CESTAT on whether such CSR can be brought into the purview of the definition given under the Cenvat Credit Rules

  • The appellant’s contention was that it had engaged youth from the lower strata of the society in its factory to provide them on the floor exposure to the production activities of the company.
  • It had engaged them in preparation of data sheet, maintenance of production log book, preventive maintenance of the machine and they assisted in production operation as well as transfer of raw materials etc.
  • So, the same was included within the manufacturing activities besides the fact that the purpose was to discharge CSR obligations.
  • Further it was also claimed that such denial of cenvat credit could not be done at the receivers end in view of settled position of law.
  • The refusal of such cenvat credit availed by the appellant by the department, was mainly on three scores.
    1. CSR is a charity which is unrelated to production.
    2. No direct service was availed by the appellant from the said Kalama charitable Trust as it had made the expenditure itself and sought reimbursement from the appellant.
    3. The same is not in conformity to the Rules meant for raising of invoice as contemplated under Rule 9(2) besides being outside the scope of input service defined under Rule 2(l) of the Cenvat Credit Rules 2004 for which the credit as referred above was inadmissible.
  • The stand of the department was reiteration of the order-in-original passed by the Jt. Commissioner of Central Excise, that was also affirmed by the Commissioner (Appeals) on the ground that the reimbursement of expenses was nothing but financial assistance in the form of charity made to Kalama Charitable Trust.
  • Appellant argued before CESTAT with reference to the judgment passed in the case of Coca Cola India Pvt. Ltd. reported in 2009 by the High Court of Mumbai and the Supreme Court reported in 1988 (36) ELT 201 (SC), that the expression “business” as found in the definition of “input service” was not confined or restricted to mere manufacture of products and it had a wide meaning that would include those activities which might both have a direct as well as indirect significance and it could cover all the activities that are related to the functioning of business.
  • To this, the department responded that even if such an activity was not carried out, the appellant’s activity of manufacturing and sale of excisable goods would have continued.
  • To pin point the dispute, it was looked into if CSR could be considered as input service and be included within the definition of “activities relating to business”. The answer was in the affirmative.
  • It was argued by the appellant that in the Rajya Sabha, the Minister of Corporate Affairs stated on 22.02.2013 that there was no provision for CSR before introduction of Companies Bill 2012.
  • However, as found from the handbook referred, there was existence of such provision (may not be in the form of statutory provision) regarding discharging of CSR activities by the companies as it said that new guidelines issued by the DPE in April 2013 would replace two existing separate guidelines on CSR and sustainable development issued in 2010 and 2011 respectively.
  • Therefore, sustainability was dependent on CSR without which companies could not operate smoothly for a long period as they were dependent on various stake holders to conduct business economically, socially and ethically.
  • Hence in CESTAT’s view, CSR, which was a mandatory requirement for the public sector undertakings, was made obligatory also for the private sector and unless the same was 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 case laws, which had equated CSR only with charity and not covered the other aspects of CSR namely triple bottom-line approach (discussed above), corporate citizenship, philanthropy, (charity just being a part only), strategic philanthropy, share value, corporate sustainability and business responsibility were of no application to the case on hand.

Therefore, the appeal was 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 was set aside. Therefore, CSR be considered as Input service and is eligible for Cenvat Credit

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