Corporate Social Responsibility: Exclusions from statutory obligation
Corporate Social Responsibility: Exclusions from statutory obligation
Companies may be required to re-visit the activities undertaken or proposed to be undertaken as CSR and existing CSR policy, in order to effectively meet their obligations under the Act
Corporate social responsibility ("CSR") is a means for companies to invest in social and environmental causes of the country. As per Section 135 of the Companies Act, 2013 ("Act"), a company which qualifies the criteria (i.e. of net worth or turnover or net profit, during the immediately preceding finan-cial year) is required to spend, in every financial year, at least 2% (two per cent) of the average net profits of the company made during the three imme-diately preceding financial years.
Companies (CSR Policy) Rules, 2014 ("CSR Policy Rules") defines the term, 'CSR' to mean the activities undertaken by a company in pursuance of a statutory obligation laid down in Section 135 of the Act but does not include certain activities as mentioned therein.
The above definition was introduced, with effect from January 22 2021 vide the Companies (CSR Policy) Amendment Rules, 2021. Earlier, exclusions from CSR were clarified by the General Circular 01/ 2016 dated January 12, 2016 ("Circular 2016").
We would discuss the list of activities which are specifically excluded from CSR as per CSR Policy Rules:
1) Normal course of business:
The activities undertaken by the company in pursuance of their normal course of business are ineligible for CSR. The exception to this is the re-search and development activity of new vaccine, drugs and medical devic-es related to COVID-19, subject to satisfaction of certain conditions.
It is worthy to note that the term, 'normal course of business' is neither defined in the Act nor in the CSR Policy Rules. It can be understood as recurring transactions undertaken in the ordinary course of business or in the regular course of business1.
Further, vide an affidavit in the matter before the Delhi High Court2, the Ministry of Corporate Affairs ("MCA") has clarified the scope of the term "normal course of business" by giving the following example:
"....a pharmaceuticals company donating medicines/drugs within section 135 read with Schedule VII to the Act is a CSR Activity, as the same is not an activity undertaken in pursuance of its normal course of business which is relatable to health care or any other
entry in Schedule VII."
The Delhi High Court had observed that CSR activity which forms part of the core business of the company can be carried out, if it is done without a profit motive.
Now, the question arises as to whether absence of profit motive can alone qualify an activity to be undertaken outside the normal course of busi-ness.
For instance, a company engaged in the business of supply of biscuits and distributes certain quantity of biscuits to needy and poor children, then whether the same can be treated as not a normal course of business of the company? How to determine that an activity has been undertaken without a profit motive? Whether it can be treated as a brand building ex-ercise and hence, for a profit motive? Consequently, doubt remains whether the activity of the company can be treated as a CSR or not, un-der the Act?
Assuming it is treated as a CSR, then whether the same will be treated as "amount spent", and if yes, what will be the manner in which the "amount spent" will be arrived at?
2) Activities benefitting employees:
The activity which benefits employees of the company is an ineligible ac-tivity for CSR. The employees will be as defined under Code on Wages, 2019 ("Wages Code").
During the current pandemic situation, classic example can be vaccina-tion or medicine facility by companies to their employees, workers and contract labour.
Circular 2016 has clarified that CSR projects or programmes or activities that benefit only the employees of the company and their families would not qualify as CSR.
For example, a vaccination drive is proposed to be undertaken by a com-pany for a general public and is not restricted to employees of such com-pany. The question arises as to whether such a drive will be treated as an activity qualifying for CSR.
Recently, vide General Circular No. 13/2021 dated July 30, 2021, the MCA has clarified that spending of CSR funds for COVID-19 vaccination for persons, other than employees and their families, is an eligible CSR activity.
Further, in order for an activity to qualify as CSR, it is equally pertinent to analyze as to which category of persons will qualify to be employees for the purpose of Wages Code. Apprentices and interns are specifically ex-cluded from the ambit of workers and consequently, from the employees.
3) Activities undertaken outside India:
The activity undertaken by the company outside India is an ineligible ac-tivity for CSR. The exception is training of Indian sports personnel repre-senting any State or Union territory at national level or India at interna-tional level.
As per the proviso to Section 135, the company should give preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities.
MCA vide FAQ on CSR cell has clarified as below:
"Whether contribution in kind is permissible as CSR or not?
Section 135 prescribes "….shall ensure that company spends….".The company has to spend the amount.
Let us understand the present exclusion by way of illustrations:
A company imports oxygen cylinders into India and makes payment in foreign currency to a foreign supplier as per Indian foreign exchange rules. The said oxygen cylinders are further distributed to hospitals or trusts in India for fulfilling CSR obligation.
Based on the Section read with FAQ, a doubt arises as to whether ex-penditure should mandatorily be incurred in cash in India by a com-pany, to qualify as CSR expenditure. Considering the intention behind CSR, it appears that the activity of providing oxygen cylinders by a com-pany should qualify as CSR as the benefit will be availed by the public, in India.
However, in case, such oxygen cylinders were distributed outside India, it will not qualify as CSR on the grounds that it is provided outside India.
The expenditure incurred by a company for meritorious students towards his or her education in a foreign university pursuant to a sponsorship program. The question arises as to whether such an expenditure can be treated as an eligible activity or not since the amount will be spent out-side India for an Indian student.
4) Marketing or sponsorship:
The activity supported by the companies on sponsorship basis for deriv-ing marketing benefits for its products or services.
In order to qualify an activity as eligible for CSR, activity should be un-dertaken in project or programme mode. One-off events such as mara-thons or awards or charitable contribution or advertisement or sponsor-ships of programmes etc. will not be qualified as CSR expenditure. (Refer General Circular No. 21/2014 dated June 18, 2014).
Basis the above, it is worthy to note that CSR expenditure per se should not be incurred for marketing of products or services by a company. How-ever, while incurring CSR expenditure, a company may use its logo which will surely promote the brand of a company and is not debarred.
5) Statutory obligations:
The activity carried out for fulfilment of any other statutory obligations under any law in force in India.
The expenses incurred by companies for fulfillment of any act or statute or regulations (such as labour laws, land acquisition Act etc.) will not be counted as CSR expenditure under the Act. (Refer General Circular No. 21/2014 dated June 18, 2014).
Further, while undertaking CSR obligation, company should not contra-vene other provisions of the law.
6) Contribution to any political party:
The contribution of any amount directly or indirectly to any political par-ty is also ineligible for CSR.
On a concluding note, we would like to highlight that the companies are liable to fulfill their CSR obligations as per the Act. Appropriate steps should be taken by the companies to ensure that the expenditure incurred towards an activity qualifies as CSR expenditure and therefore, is in compliance with the mandatory obligation imposed by the Act.
Further, the companies may be required to re-visit the activities undertaken or proposed to be undertaken as CSR and existing CSR policy, in order to effectively meet their obligations under the Act.