CENVAT Credit Cannot Be Claimed On Expenses Incurred On CSR: Delhi CESTAT

The Bench, consisting of members Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member), ruled that the fact that the CSR is a legal responsibility does not make it an output service.

The appellant M/s. Power Finance Corporation Ltd. is a non-banking finance corporation, who is engaged in financing of projects. The appellant pays service tax on banking and other financial services rendered by it. The appellant took CENVAT Credit on the service tax paid by it on the services utilised for activities related to its Corporate Social Responsibility (CSR). The Commissioner of Central Excise and Service Tax passed an order denying the said CENVAT Credit to the appellant. The revenue department held that since the appellant was engaged in rendition of banking and other financial services, the activities related to the appellant's CSR did not qualify as an input service so as to be eligible for CENVAT Credit.

Against the said order, the appellant filed an appeal before the CESTAT.

The appellant Power Finance Corporation submitted before the CESTAT that it had incurred expenditure on CSR in discharge of its statutory liability under Section 135 of the Companies Act, 2013. The appellant averred that the services availed by it in respect of its CSR activities qualified as an input service as per Rule 2(l) of the CENVAT Credit Rules, 2004.

The revenue department averred that under Rule 2(l) of the CENVAT Credit Rules, 2004, the term "input service" is defined as any service used by a provider of output service for providing an output service.

The revenue department submitted that the output services provided by the appellant were "banking and other financial services". The revenue department contended that the CENVAT Credit taken by the appellant on the expenses incurred by it on its CSR activities does not have any nexus with its output services.

The CESTAT noted that as per the definition of input services provided under Rule 2(l) of the CENVAT Credit Rules, 2004, only such services which are used by the service provider for providing an output service qualify as input service.

"A provider of output service may utilise several services in its business and may pay service tax on them. If the legislative intent was to allow a provider of output service to avail Cenvat Credit on all such services, the rule would have read as "any service used by the provider of output services". However, it does not read so. It qualifies the definition by "for providing output services"."

The CESTAT observed that there could be services which are used by the service provider to provide output services and there could be services which are not used for providing the said output services. The CESTAT ruled that CSR fell under the latter category and that it had no nexus with the input services utilized by the appellant to provide output services, i.e., the banking and other financial services.

The CESTAT ruled that after rendering the output services, if the appellant earns some profit or meets the criteria as specified under Section 135 of the Companies Act, 2013, there would be a legal obligation on the appellant to spend some amount on its CSR activities. The CESTAT held that the said obligation was consequent to the rendering of the output services and not before they are rendered.

Thus, the CESTAT held that expenses incurred on CSR could not be termed as input services for providing the output services. The CESTAT added that the fact that the CSR is a legal responsibility does not make it an output service.

The CESTAT observed that the appellant had relied on the decision given by the Mumbai Bench of CESTAT in the case of Essel Propack Ltd. versus Commr. Of CGST Bhiwandi (2018), in support of its averments. The CESTAT Mumbai in that case had held that CSR can be considered as an input service and can be included within the definition of "activities relating to business".

The CESTAT held that the said order passed by the Mumbai Bench of CESTAT did not lay down the correct law. The CESTAT ruled that Rule 2 (l) of the CENVAT Credit Rules, 2004 does not provide that "activities relating to business" shall be included as input service. The CESTAT held that the Tribunal can only apply Rule 2 (l) and that it cannot modify or enlarge the scope of the said Rule, it being a legislative or a quasi-legislative function. The CESTAT thus ruled that one cannot read words such as "activities relating to business" into the definition of input services under Rule 2(l).

Thus, the CESTAT ruled that the appellant was not entitled to CENVAT Credit on the services utilised by it for its CSR activities. The CESTAT thus upheld the order of the revenue authorities denying CENVAT Credit to the appellant on the expenses incurred by it on its CSR activities, within the normal period of limitation.

Case Title: M/s. Power Finance Corporation Ltd. versus Commissioner (Appeal), Central Excise & Service Tax, LTU, New Delhi

Dated: 09.06.2022 (CESTAT Delhi)

Representative for the Appellant: Mr. Varun Gaba, Advocate, Mr. Atul Gupta & Mr. Anmol Gupta, CA for the Appellant

Representative for the Respondent: Mr. Ravi Kapoor, Authorized Representative of the Department

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