The Delhi Bench of the Customs, Excise and Service Tax Appeals Tribunal (CESTAT) ruled that expenses incurred by a person for activities related to their corporate social responsibility (CSR) cannot be qualified as entry services and therefore CENVAT credit cannot be claimed thereon.
The bench, made up of members Rachna Gupta (judicial member) and PV Subba Rao (technical member), ruled that the fact that CSR is a legal responsibility does not make it an exit service.
The caller M/s. Power Finance Corporation Ltd. is a non-banking financial company engaged in project financing. The appellant pays a tax on the banking and other financial services he renders. The appellant took CENVAT Credit on the service tax paid by him on services used for activities related to his corporate social responsibility (CSR). The Commissioner of Central Excise and Service Tax issued an order denying said CENVAT credit to the Appellant. The Revenue Department found that since the appellant was engaged in the provision of banking and other financial services, the appellant’s CSR-related activities were not considered an entry service to be eligible. to CENVAT credit.
Against said order, the Appellant appealed to the CESTAT.
The appellant Power Finance Corporation argued before the CESTAT that it incurred CSR expenditure while discharging its legal liability under section 135 of the Companies Act 2013. The appellant claimed that the services availed by it in connection with its CSR activities qualify as entry service under Rule 2(l) of the CENVAT Credit Rules, 2004.
The Revenue Department asserted that under Rule 2(l) of the CENVAT Credit Rules, 2004, the term “inbound service” is defined as any service used by an outbound service provider to provide a service Release.
The Department of Revenue argued that the outgoing services provided by the appellant were “banking and other financial services”. The revenue department argued that the CENVAT credit taken by the appellant on expenses he incurred in connection with his CSR activities has no connection with his exit services.
CESTAT noted that, in accordance with the definition of input services provided under Rule 2(l) of the CENVAT Credit Rules, 2004, only services which are used by the service provider to provide an output service are considered entry services.
“An exit service provider may use more than one service in the course of its business and may pay a service tax. If the legislative intent was to allow an exit service provider to claim Cenvat credit on all such services, the rule would read as ‘any service used by the egress service provider’. However, this is not the case. It qualifies the definition as ‘to provide egress services’.”
CESTAT observed that there may be services which are used by the provider to provide exit services and there may be services which are not used to provide said exit services. The CESTAT judged that CSR fell into the latter category and that it had no connection with the entry services used by the caller to provide exit services, i.e. banking and other financial services.
CESTAT ruled that after rendering the exit services, if the caller makes a profit or meets the criteria specified in section 135 of the Companies Act 2013, there would be a legal obligation on the caller to spend a certain amount on its CSR activities. The CESTAT considered that the said obligation was consecutive to the provision of termination benefits and not prior to their provision.
Thus, the CESTAT considered that the expenses incurred for CSR could not be qualified as input services to provide the output services. CESTAT added that the fact that CSR is a legal responsibility does not make it an output service.
CESTAT observed that the Appellant had relied on the decision rendered by CESTAT’s Mumbai Bench in the case of Essel Propack Ltd. against Com. From CGST Bhiwandi (2018), in support of his claims. In this case, CESTAT Mumbai had considered that CSR could be considered as an entry service and could be included in the definition of “business-related activities”.
CESTAT held that the said Ordinance adopted by the Mumbai Bench of CESTAT did not establish the correct law. CESTAT ruled that Rule 2(l) of the CENVAT Credit Rules, 2004 does not provide that “business related activities” should be included in entry services. The CESTAT considered that the Tribunal can only apply Article 2 (l) and that it cannot modify or enlarge the scope of application of this article, this being a legislative or quasi-legislative function. CESTAT therefore ruled that words such as “business-related activities” cannot be read into the definition of input services under Rule 2(l).
Thus, the CESTAT ruled that the appellant was not entitled to the CENVAT credit on the services used by it for its CSR activities. The CESTAT thus confirmed the order of the tax authorities refusing the applicant the CENVAT credit on the expenses incurred by it in respect of its CSR activities, within the normal limitation period.
Case title: M/s. Power Finance Corporation Ltd. Counter Commissioner (Appeal), Central Excise & Service Tax, LTU, New Delhi
Date: 09.06.2022 (CESTAT Delhi)
Appellant’s Representative: Mr. Varun Gaba, Lawyer, Mr. Atul Gupta and Mr. Anmol Gupta, CAs of the Appellant
Respondent’s Representative: Mr. Ravi Kapoor, Authorized Department Representative
Click here to read/download the order