1.1.1 Corporate Social Responsibility (CSR) in India is a statutory requirement under the Companies Act, 2013. Specifically Section 135 and Schedule VII of the Act provide for the CSR compliances along with the Companies (Corporate Social Responsibility Policy) Rules, 2014.
1.1.2 India is the leading country in the world to pass such a legislation. In this chapter a brief summary of the CSR provision and the analysis thereof has been provided.
1.2.1 CSR law became effective from 1st April, 2014. In other words, it will apply from the financial year 2014-15. The Companies Act, 2013 received the assent of the President of India on 29th August 2013.
1.2.2 The Ministry of Corporate Affairs (MCA) has vide its notification dated 27 February 2014, and in exercise of powers conferred by Section 1(3) of the Companies Act, 2013 (‘the Act’), notified 1 April 2014 as the date on which the provisions of Section 135 and Schedule VII of the Act shall come into force. The MCA has also notified the Companies (Corporate Social Responsibility Policy) Rules, 2014 (‘the Rules’) to be effective from 1 April 2014.
Companies to Which it Applies
1.3.1 As per section 135(1) of CSR Law applies to every Indian Company fulfilling at least one of the following criteria in any financial year:
• Net worth of rupees five hundred crore or more,
• Turnover of rupees one thousand crore or more,
• Net Prof it of rupees five crore or more.
1.3.2 Meaning of any financial year –
a) Vide General Circular No. 21/2014 MCA has clarified that “Any financial year” referred under sub-section (1) of Section 135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014 implies ‘any of the three preceding financial years.
b) Therefore, to determine applicability from Financial Year 2014-15 onwards, the company would need to ascertain fulfillment of any of the three financial criterion in the following manner :
Any of the financial criterion fulfilled
|CSR provisions in either of the three years applicable for|
|2011-12, 2012-13, 2013-14||2014-15|
|2012-13, 2013-14, 2014-15||2015-16|
|2013-14, 2014-15, 2015-16||2016-17|
c) Hence any financial criterion met for financial year 2010-11 or prior, but not met in the block of three years from 2011-12 to 2013-14 would mean that company is not required to comply with CSR provisions for the financial year 2014-15.
1.3.3 As per Rule 3(1) of CSR Rules, 2014 –
(1) Every company including its holding or subsidiary and a foreign company defined under clause (42) of section 2 of the Act having its branch office or project office in India which fulfils the criteria specified in subsection (1) of section 135 of the Act shall comply with the provisions of section 135 of the Act and these rules:
Provided that net worth, turnover or net profit of a foreign company of the Act shall be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance with the provisions of clause (a) of sub-section (1) of section 381 and section 198 of the Act.
1.3.4 The criterion needs to be fulfilled by individual company. Therefore, if the holding company or the subsidiary company themselves fulfils the criteria specified in Section 135, all the provisions mentioned therein become applicable to such company. Merely being a holding or subsidiary company of a company which fulfils the criteria under section 135(1) does not make the company liable to comply with section 135, unless the company itself fulfils the criteria.
Financial Criteria of Applicability of CSR
1.4.1 Under sub Section(1) of Section 135 the CSR law applies to every Company fulfilling at least any one of the following criteria :
a. Net worth of rupees five hundred crore or more,
b. Turnover of rupees one thousand crore or more,
c. Net Prof it of rupees five crore or more during any financial year.
1.4.2 In case of Foreign Companies the Net Profit of such Company shall be determined as per the profit and loss account prepared under Section 381(1)(a) read with Section 198 of the Companies Act, 2013, see para 1.3.3.
Amount to be Spent on CSR
1.5.1 As per Section 135(5) of the Companies Act, 2013, the Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent of the average net prof its of the company made during the three immediately preceding ffinancial years.
Meaning of Net Profit & the Average Net Profit
1.6.1 Section 135 has not defined the term ‘Net Prof it’ though explanation to Sec. 135 says “For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.”
1.6.2 As per Rule 2(f) of CSR Rules, 2014 – “Net profit” means the net profit of a company as per its financial statement prepared in accordance with the applicable provisions of the Act, but shall not include the following, namely : -
(i) Any profit arising from any overseas branch or branches of the company, whether operated as a separate company or otherwise; and
(ii) Any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act;
Provided that net profit in respect of a financial year for which the relevant financial statements were prepared in accordance with the provisions of the Companies Act, 1956, (1 of 1956 shall not be required to be re-calculated in accordance with the provisions of the Act.
1.6.3 It is important to understand the meaning of Net Prof it & the Average Net Profit for the purpose of determining the coverage and/or to determine the amount to be spent. On combined study of sections and rules as stated above, we understand that to determine the coverage as well as to determine the amount to be spent, NET PROFIT should be calculated on the basis of section 198 of the Companies Act, 2013 and thereafter deduction should be made as provided in Rule (2)(f) of the CSR Rules i.e. the deduction should be made of profit arising from overseas branches of a company or dividend received from other companies in India which are covered under & complying with the provisions of section 135 of the Act.
1.6.4 The Rule also makes it clear that the Net Prof it in relation to financial statement prepared under 1956 Act shall not be required to be re-calculated as per Section 198 of the Companies Act. However, in our opinion, the profit from overseas branches of a company or dividend received from other companies in India should be deducted while determining the Net Profit for the Financial Year falling under 1956 Act.
1.6.5 In case of Foreign Companies the Net Profit of such Company shall be determined as per the profit and loss account prepared under Section 381(1)(a) read with Section 198 of the Companies Act, 2013.
Surplus Generated from CSR Activities
1.7.1 Under Rule 6(2) the CSR Policy of the Company shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a Company. In other words surplus generated from CSR activities should be ploughed back to CSR funds over and above the 2% contribution. In our opinion only income from the surplus from CSR activities will be taxable if the CSR activities are implemented directly by the Company. Such surplus shall be exempted from tax in the hands of the company, if the CSR activities are implemented through registered NPOs and the income from CSR directly accrues to the implementing NGOs.
1.7.2 Some instances of surplus from CSR funds / activities could be (i) Fees collected, if any, from the trainees or beneficiaries, (ii) Sale of any CSR asset, etc.
1.8.1 All Companies to which the CSR laws apply shall under Rule 5 constitute CSR Committee of 3 or more members including one independent member. However, the requirement of 3 member including independent will not be applicable in following circumstances :
(i) an unlisted public Company or a private Company covered under sub- Section (1) of Section 135 which is not required to appoint an Independent Director pursuant to sub-Section (4) of Section 149 of the Act, shall have its CSR Committee without such Director;
(ii) a private Company having only two Directors on its Board shall constitute its CSR Committee with two such Directors;
(iii) with respect to a Foreign Company covered under these Rules, the CSR Committee shall comprise of at least two persons of which one person shall be as specified under clause (d) of sub-Section (1) of Section 380 of the Act and another person shall be nominated by the Foreign Company.
1.8.2 It may be noted that as per clause (d) of sub-Section (1) of Section 380 of the Act a Foreign Company is required to provide the name and address of one or more person resident in India authorised to accept on behalf of the Company service or process and any notices or other documents required to be served on the Company.
Role of CSR Committee
1.9.1 The CSR Committee shall institute a transparent monitoring mechanism for implementation of the CSR projects or programs or activities undertaken by the Company. Further the role of CSR Committee shall include :
• Formulate the CSR policy and recommend to the board.
• Planning, Budgeting and Recommending expenditure on CSR to the board.
• Prepare strategic plans & implementation schedules for CSR expenditures.
• Monitor the implementation of the CSR projects or programs or activities undertaken by the Company.
• Ensure that the surplus (if any) generated from CSR activities are ploughed back to the CSR funds over and above the 2% contribution.
Role of the Board of the Company
1.10.1 The Board of the Company will be legally accountable for the CSR activities and shall have an oversight function over the CSR Committee. Further the role of the Board shall include :
• To constitute the CSR Committee.
• To approve the CSR policy.
• To keep oversight control of the CSR activities.
• To ensure legal compliance of at least 2% spending.
• Report CSR activities.
• Disclose reason for non compliance or under spending, if any under Section 134(3)(o) of the Companies Act, 2013 specifying the reasons for not spending.
• Ensure that report of the Board on CSR activities including the content of the CSR policy are uploaded on the official website of the Company.
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