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Cos Act Ep#14: Corporate Social Responsibility

Published on Sat, Aug 02,2014 | 16:17, Updated at Wed, Aug 06 at 18:09Source : CNBC-TV18 |   Watch Video :

India is the first country in the world to legislate a corporate conscience! This week we focus on Section 135 – Corporate Social Responsibility. It’s a new provision and to see how India Inc is working towards implementing it, I have today with me Ashok Gupta of the Aditya Birla Group and Shardul Shroff of Amarchand Mangaldas.

Section 135 says every company public or private or a foreign company branch in India with a net worth of Rs 500 crore or more or a turnover of Rs 1,000 crores or more or a profit of Rs 5 crore or more shall spend at least 2 percent of its average annual net profit over the three proceeding years in pursuance of its Corporate Social Responsibility (CSR) policy or explain why it hasn’t. This policy will be formulated and monitored by a board CSR committee approved by the board and disclosed in the board’s report. The rules and a subsequent circular specify that CSR activities must exclude activities undertaken in the normal course of business or those only benefiting employees and their families. Political contributions will not be considered CSR.

All CSR activities must pertain to activities only in India. One-off event such as marathons, awards, charitable contributions, advertisements, sponsorships of TV programmes etc. would not qualify as part of CSR spend. CSR can be undertaken via a trust, society or company established by the company. If not established by the company itself then the trust, society or company must have a three year track record in doing similar work. The spent on building CSR capacities, internal or external should not exceed 5 percent of total CSR expenditure in a year. Salaries paid to CSR staff and company volunteers can be factored into CSR costs.

As for what qualifies as CSR activities, Schedule VII contains a shortlist of ten categories aligned closely to UN millennium development goals but in a February notification the ministry expanded the list to include activities such as setting up old age homes, animal welfare and public libraries.

In a June circular the MCA said the extended list can be liberally interpreted…

CORPORATE SOCIAL RESPONSIBILITY
Section 135
Every company with
Networth >= Rs 500 cr  OR  Turnover >= Rs 1000 cr
                                          OR
                         Net Profit >= Rs 5cr


CORPORATE SOCIAL RESPONSIBILITY
Section 135
‘The Board…shall ensure…that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy’

‘Provided…that if the company fails to spend such amount, the Board shall…specify the reasons for not spending the amount’

CORPORATE SOCIAL RESPONSIBILITY
Section 135
Company Board to constitute CSR Committee
3 or more directors (At least 1 Independent)

CSR Committee
- Formulate CSR Policy
- Recommend expenditure
- Monitor CSR policy

Board
To approve CSR policy, make disclosures & ensure implementation

CORPORATE SOCIAL RESPONSIBILITY
Section 135 Rules

-  Excludes activities undertaken in pursuance of normal course of business
- Activities that benefit only employees of the company shall not be considered
- Contribution directly/indirectly to political party shall not be considered
- Only projects/activities undertaken in India shall count


CORPORATE SOCIAL RESPONSIBILITY
MCA Circular (June 2014)

One-off events such as marathons/awards/charitable contribution/advertisement/sponsorships of TV programmes etc. would not qualify as CSR

CORPORATE SOCIAL RESPONSIBILITY
Section 135 Rules

- May undertake CSR activities through registered Trust/ Society
- Or via company or its holding/subsidiary/associate under Section 8

If  Trust/Society/Company is not established by the company
- it must have track record of 3 years  in undertaking similar programs
-  the company must specify activities, fund utilisation & monitor

CORPORATE SOCIAL RESPONSIBILITY
Section 135 Rules
Expenditure on building CSR capacities and training
Shall not exceed 5% of total CSR spend in one financial year

MCA Circular (June 2014)
Salaries paid to  regular CSR staff & volunteers
Can be factored into CSR project cost as part of CSR expenditure

CORPORATE SOCIAL RESPONSIBILITY
Schedule VII
Eradicating extreme hunger & poverty
Promotion of education
Promoting gender equality & empowering women
Reducing child mortality & improving maternal health
Combating HIV & AIDS, malaria…
Environmental sustainability
Enhancing vocational skills
Social business projects
Contribution to the PM's National Relief Fund
Other matters as may be prescribed.

CORPORATE SOCIAL RESPONSIBILITY
Schedule VII (As of Feb 2014)

Eradicating hunger, poverty & malnutrition
Promoting preventive health care
Promoting sanitation
Making available safe drinking water
Promoting education, including special education
Promoting employment enhancing vocation skills
Livelihood enhancement projects
Promoting gender equality
Empowering women
Setting up homes/hostels for women & orphans
Setting up old age homes, day care centres
Ensuring environmental sustainability
Ecological balance, protection of flora & fauna
Animal welfare
Agro-forestry
Conservation of natural resources
Maintaining quality of soil, air & water
Protection of national heritage, art & culture
Restoration of historical buildings/sites
Restoring works of art
Setting up public libraries
Development of traditional arts & handicrafts…
Measures for benefit of armed forces veterans...
Training to promote sports
Contribution to PM National Relief Fund
Contributions to technology incubators
Rural development projects

CORPORATE SOCIAL RESPONSIBILITY
MCA Circular (June 2014)

‘…while activities undertaken in pursuance of the CSR policy must be relatable to Schedule VII of the Companies Act 2013, the entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule…’

Doshi: And then it answers some yes and no questions that people have put to it saying would this qualify as CSR or no and in saying yes, it has included all kind of activities; driver’s training, giving medical and legal aid to road accident victims, consumer protection services, renewable energy projects, slum redevelopment, all of these under that circular would qualify as CSR even if it may seem a stretch for instance giving medical and legal aid to road accident victims has come under preventive healthcare which is a bit of a stretch but the ministry has said we will allow it, right. Is this a good thing that companies have been given considerable flexibility in deciding what qualifies as their CSR activity?

Is this CSR?
Medical & legal aid to road accident victims
MCA: YES…Under ‘Promoting health care’

Is this CSR?
Drivers’ training
MCA: YES…Under ‘Vocational Skills’

Is this CSR?
Consumer protection activities
MCA: YES…Under ‘Promoting Education’

Shroff: I think there is a little history and let me put it contextually to a question which was asked to the ministry, Sachin Pilot at the annual general meeting (AGM) of Confederation of Indian Industry (CII). He had actually said that treat this whole schedule as redundant, I am going to change it and say ‘as the board of the directors may desire’.

Doshi: So that’s full freedom.

Shroff: He wanted to give full freedom and that very same amendment went to the ministry of law and it was shot down. So, the ministry of law has taken a view that you need specificity and you cannot have the freedom to decide what you want. You have to do something which is conceptualised and specified because if this is section, the section says specified in Schedule VII. So that was a rational of the ministry of law saying now. Subsequently the ministry of corporate affairs has now, on the basis of questions asked said we are going to liberally interpret this and we will receive the questions and interpret it if it falls in one or other item under Schedule VII. So, that is the development. I do not think there is anything wrong in it as long as the expenditure is achieved on what the ministry considers as corporate social activity.

Doshi: But anything could be construed if you look at the circular of June, anything could be construed as CSR.

Shroff: But you have to get clarification. What happens is that if they done this on their on suo moto and the government had not clarified, they would be hard placed.

Doshi: So either stick to the specific activities laid down in schedule VII or if I want to liberally interpret this then I need to get some sort of MCA nod on this?

Shroff: Correct.

Doshi: This is good news for corporate India because it gives you great degree of flexibility to choose the CSR activity of your choice?
Gupta: It is indeed and I personally feel that the Directors now have greater freedom to choose right project or activity which they would like to spend money on and see meaningful difference to the society. It is pretty good.    

Doshi: I want to them come into how you go about as a company doing this CSR, what qualifies is the cost of CSR which has been capped at 5 percent of the actual CSR spend of 2 percent itself, can you outsource the CSR, can you not being able to avail of a tax deduction which is fairly clear in this Budget, choose to give the money that two percent to a charitable organisation and avail of some degree of tax deduction at least through that route, these are the many questions I have. So let me start first with you Mr. Shroff, on how do you structure this, what is the structure that most people are using, do it in-house, set up your own trust, do it with an external trust, what is preferable?

Shroff: This mandate of the section is clear that the company has to do it. When you read 135 (1)(2)(3), it is quite clear that the board of the company has to constitute a special committee called the Corporate Social Responsibility committee three or more, one independent director. That is the constitutional framework. So the first step is always to set up a CSR committee.

CORPORATE SOCIAL RESPONSIBILITY
Section 135
Company Board to constitute CSR Committee
3 or more directors (Atleast 1 Independent)

CSR Committee
- Formulate CSR Policy
- Recommend expenditure
- Monitor CSR policy

Board
To approve CSR policy, make disclosures & ensure implementation

After that there are three obligations, which are imposed on that committee. The committee has to formulate a CSR policy, it has to recommend an expenditure, this is very important and it helps us interpret the subsequent questions; recommend the amount of expenditure to be incurred. So the company decides this is the expenditure that I am going to incur on these issues of CSR and it has to monitor the CSR responsibility. There has been a lot of confusion in the members of the public and companies that is it the obligation of a third party namely is it an objective of a trust/ society/ section 8 company and is it that I handover this activity?

CORPORATE SOCIAL RESPONSIBILITY
Section 135 Rules

- May undertake CSR activities through registered Trust/ Society
- Or via company or its holding/subsidiary/associate under Section 8

If  Trust/Society/Company is not established by the company
- it must have track record of 3 years  in undertaking similar programs
-  the company must specify activities, fund utilisation & monitor

Doshi: So can you outsource it?

Shroff: Correct, if I outsource the entire CSR or only outsource the execution of the CSR, what is the mandate of the law. So my first point was that it was not intended to be mandated but because of the hue and cry, lack of expertise exercising it, they permitted it to be extended to their own trust/ foundation/ society or section 8. So they didn’t intended to be given to third party but those trusts also had problems because if the company didn’t have the expertise, their own trust/ company created for doing CSR would not have it. So then they carved out the further process that no you can use this type of companies of third parties provided a three year track record.

CORPORATE SOCIAL RESPONSIBILITY
Section 135 Rules

- May undertake CSR activities through registered Trust/ Society
- Or via company or its holding/subsidiary/associate under Section 8

If  Trust/Society/Company is not established by the company
- it must have track record of 3 years  in undertaking similar programs
-  the company must specify activities, fund utilisation & monitor
 
Doshi: That is all in the rules.

Shroff: Correct.

Doshi: Let me ask my question -- if as a company I was to set up a trust, that is option A and option B is there is an external trust that exists, CRY, AAKANSHA anyone of them. If I make or put money towards the trust that I have set up, can I get a tax deduction if that is a charitable trust and if I get a tax deduction would it still qualify as a part of my CSR spend? Equally, if I put money to an external trust, which would have otherwise given me a tax deduction a year ago, can I avail of that tax deduction and still count that towards my CSR spend, what is your interpretation?

Gupta: My interpretation is yes, in both the cases. The reason is -- what are the requirements of CSR. Number one is that both the acts are not interrelated in any way. All I am required to spend 2 percent on CSR related activities either by myself or through a trust. So if there is a charitable trust to answer your question --

Doshi: Internal or external?

Gupta: Internal or external and satisfying all the conditions as laid down by section 134 and the rules there namely that they are exclusively engaged in activities relating to CSR into rule 7 and that I am able to generate project report then I should get deduction and if this trust or society is registered under the income tax act, I should get the benefit or the contribution made to society like this and yet qualify myself for CSR spend.

Doshi: So if till 2012 or 2013 I was making an annual contribution to let us say CRY or AAKANSHA or many well-known such efforts and I was getting a tax deduction on my contribution to them, I can continue to do that now in FY15, get the tax deduction and still categorise this spend as CSR spend, that is your understanding of it?

Gupta: With a minor modification, you have to have projects.

Doshi: You have to be involved in where that money is going, etc

Gupta: Absolutely.

Doshi: But you can still avail of the tax deduction and still count it as CSR.

Gupta: Absolutely.

Doshi: That is the question; can you avail of the tax deduction that comes through a charitable contribution and still call it CSR?

Shroff: Read the clarification very carefully. Contribution to a corpus/trust/society/section 8 -- this is not a charitable trust/ society -- section 8 is a not-for-profit company, it is not as if it is a charitable company, it is not a company to do charity. These are very specific, they have not appended the word charity before these words, there can be a business trust, there can be a CSR trust, those are also types of trusts. So what is contemplated by this clarification is that these companies will qualify as CSR expenditure. Normally setting up a trust is not an expenditure; it is a capital kind of payment for starting up companies like capital of the company. So when you spend for creating the capital of a section 8 company, which would normally be a wholly owned subsidiary then that capital would be considered as CSR expenditure.

CORPORATE SOCIAL RESPONSIBILITY
MCA Circular (June 2014)
‘Contribution to Corpus of a Trust/ society/ section 8 companies etc. will qualify as CSR expenditure as long as (a) the Trust/ society/ section 8 companies etc. is created exclusively for undertaking CSR activities or (b) where the corpus is created exclusively for a purpose directly relatable to a subject covered in Schedule VII of the Act’

After this creation has happened, let us test it further - section 135 (1) comes into play, what does it say - company is to create a policy, company is to recommend expenditure on CSR and if you take schedule, the strict interpretation will be contributing to a trust/society, is it CSR, it is not in schedule 7.

CORPORATE SOCIAL RESPONSIBILITY
Schedule VII
Eradicating extreme hunger & poverty
Promotion of education
Promoting gender equality & empowering women
Reducing child mortality & improving maternal health
Combating HIV & AIDS, malaria…
Environmental sustainability
Enhancing vocational skills
Social business projects
Contribution to the PM's National Relief Fund
Other matters as may be prescribed.

Doshi: You are saying if it is a charitable contribution on which you can avail of a tax deduction it would not amount to CSR?

Shroff: It would be available in charity. It will not be available in CSR.

Gupta: We are reading too much in this simply because I made a contribution to charitable trust and that trust is doing those activities which are specified in Schedule VII because I get a benefit…

Shroff: On reading on the notes on clauses of Section 37 amendment in the Finance Bill, it is quite clear that it will not be allowed because they are even extending it by saying application of income. So, they are saying that I do not allow it because it’s application of income and not expenditure.

CORPORATE SOCIAL RESPONSIBILITY
Finance Bill, 2014

Amendment to Section 37
‘any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession’

Gupta: So the rational and logic of income tax in Section 37, which Shardul has been referring, when you are claiming this as a business expenditure – very clearly. I am not finding fault with it. I didn’t say that I can claim reduction 100 percent, I didn’t say that.

Doshi: Only whatever 50 percent reduction that is available...

Gupta: No. Even today I can make contribution to charitable trust and get 50 percent reduction. Why would it make any difference?

Doshi: Some of the questions that many companies have been asking is how we structure this if we are a small company with profit of Rs 5 crores. We have crossed the threshold; we have to do 2 percent, should we do this on our own, should we do it through a charitable contribution, should we pool money with other companies. What is it that you are telling companies to do, how should small companies go about meeting this CSR requirement?

Shroff: For small companies our recommendation has been – don’t start setting up your own trust because you can use other trusts and you will have the ability also to then pool other peoples’ CSR 2 percent value in creating a much larger product than what you could achieve by your own.

Doshi: What are some of the implementation challenges Mr. Gupta that you have come through.

Gupta: Let me add to…One factor is very valid but second factor also is smaller company with a smaller unit operating in a society, intention is that even if the amount is small but he would like to be seen as if it is done by them – society. So, there are many considerations, not only one, there are many considerations to be considered even for a smaller company. Having said that there will be teething problems in terms of like there are issues which have been thrown open, there is a list first of all, Schedule VII, you have to fit in there in any case, liberally interpret it as Shardul is saying, you do not want to play foul when you are doing a social responsibility, you want to still fall inline. Second, tax angle we have to look at, the structure angle. We have to also have to monitor it and since I believe in that activity, I would like to know where it is going, how it is going. How it is accounted for. What progress it is making, what is the base level, how did I achieve directionally?

Doshi: How are you structuring all of this? Are you doing through trusts that are owned by the group, are you doing it through trusts owned outside the group, are you doing a combination of both especially for a larger group as yours, you would be using multiple routes as oppose to just one?

Gupta: It is combination quite naturally, for us for instance we are operating in remote area, we have school, we have hospital which are also thrown open to outsiders and we are not charging full cost, we subsidize. So, it makes a lot of sense because it is used by my employees, it is used by outsiders, this is CSR in many ways.

Doshi: As long as it’s not exclusively used by employees you can still count it towards CSR, right?

Gupta: Yes.

Corporate India has not quite welcomed the new corporate social responsibility (CSR) provision with open arms. In fact it has likened it to a tax, as the expenditure on CSR is not tax deductible, that too a tax imposed via a company law that many lawyers say is sufficient grounds for challenge.

CORPORATE SOCIAL RESPONSIBILITY

               India Inc.
2% mandatory CSR spend is akin to tax!

              Government
A tax deduction would mean Govt paying 33% of CSR cost!

Gupta: If it is considered to be a mandatory requirement that you must spend that kind of money and the ‘explain’ part is taken away then there is a strong reason for you to say it is a matter of tax; on the one hand you are giving tax deductibility, secondly you are asking me to do it, but which is not the case here. He is saying that we are encouraging every company to spend at least two percent or if you cannot spend this please explain this away.

CORPORATE SOCIAL RESPONSIBILITY
Section 135
‘The Board…shall ensure…that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy’

‘Provided…that if the company fails to spend such amount, the Board shall…specify the reasons for not spending the amount’

Shroff: I hold a different view and let me tell you why, it is a language of the Section. This issue was debated in the parliament, they asked for a modification of the word ‘shall ensure’, ‘may ensure’ and they rejected it. So the words used in subsection 5 of 135 is shall ensure. Now shall is a word of mandate, shall is not a word of choice. So tomorrow I am saying that this is probably going to get tighter and tighter because the way the Section is drafted, it is not an optional process; ‘shall ensure’ doesn’t mean ‘may ensure’.

Doshi: And yet in the proviso they say that if the company fails to spend such amount the board shall in its report made under clause whatever specify the reasons for not spending the amount and there is no penalty provision in 135 specifically?

CORPORATE SOCIAL RESPONSIBILITY
Section 135
‘The Board…shall ensure…that the company spends, in every financial year, at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy’

Shroff: I disagree with you there also.

Doshi: I am just asking, I am not holding a view but I am asking?

Shroff: I will tell you why. If the interpretation of 135-5 is ‘shall’ means mandatory then when you read the proviso ‘shall’ would means that it was mandatory to spend, you didn’t spend but you explain. I am going to punish you, Section 450 is intended to..... (Interrupted)

Doshi: But it is omnibus.

Shroff: It is but that also is a penalty therefore that is not as if it is non actionable.

Doshi: So you are saying it is on the face of it comply or explain but it is not comply or explain. It is comply or be punished?

Shroff: Yes, monetary punish, it is not a crime but a monetary fine nevertheless which is very wide reaching. The Section 450 actually speaks of three categories; the company, officers in default and any other person. So a non-governmental organization (NGO) can also be liable.

CORPORATE SOCIAL RESPONSIBILITY
Section 450

Punishment where no specific penalty or punishment is provided
- The company, every office in default and such other person
- Punishable with fine of up to Rs 10000
- Further fine of Rs 1000/ day if contravention continues

Gupta: Comply or explain that is the intent of this legislation and nobody can force companies to do something.

Shroff: What if they?

Gupta: No, the question is shall and Shardul is a master of this; with courts have interpreted shall as may and may as shall. So I will not be carried away by shall.

Shroff: First three years the policy will be liberal because there is enough indication in the rules but after three years this will be tightened and shall will mean shall.

Doshi: Well nobody stops anybody from challenging three years down the line if it becomes a forced situation?

Gupta: Yes, if they are going to make it mandatory somebody is going to stand up saying say you cannot have.

Doshi: You can’t do that.

Gupta: Yes, you simply can’t do it.

Doshi: If you spend four percent this year can you carry on two percent to the next year?

Gupta: I don’t think so because this is a basic minimum. They are saying that you have a choice to spend more but you cannot claim a set off for it for the next year.

Doshi: You are sure about that?

Gupta: That I am pretty sure of it.

Doshi: If I spend four percent this year, suppose I am setting up a school the capital costs of which will be high. I am spending much more then my two percent that I need to, I spend four percent this year can I next year say look I already spend four percent in the previous year can I be excused from the two percent requirement?

Shroff: No, because it speaks of contextually the net profit of each financial.

Doshi: We are clear that you cannot carry forward?

Shroff: And secondly you will have a shareholder up rise on this one for this reason that they know the shareholders know that this is not going to be allowable in calculating business income. You are already told that, warned of that in the finance bill in Section 37’s amendment. So you know that the shareholders are going to frown on two percent going away. Then you say, no, I will spend four percent.

Doshi: But what do you do, it is a capital cost. You may have to spend some more in one year as opposed to another?

Shroff: I have a much simple solution, if you follow an impressed system of accounting basically what do you do; I have budget x because you are supposed to monitor expenditure. Let’s take a hypothetical project of say Rs 120 lakhs, you pay Rs 10 lakhs every month and you pay it only on a reimbursement basis per se NGO spent only then I will give, you will not have any overrun in the next year.

Gupta: If I want to commit a project which is very important project for the society that may entail investment of more than two percent so be it. So long as I have that liberty the next year I don’t have a project I said, okay, two percent I want to spend I don’t want to spend it, I don’t have any project, project only would require a 0.5 percent, I will explain.

Doshi: Interestingly Section 135 also applies to foreign companies in India. The rules include foreign companies as defined under Section 2 those having a place of business in India and conducting business in India in any other manner. For such foreign companies in India the CSR committee shall comprise and authorise representative as per Section 380 and a nominee, but can Indian law apply to a company not incorporated in India?

CORPORATE SOCIAL RESPONSIBILITY
Section 135 Rules
‘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…shall comply with Section 135..’

Section 2 (42)
“foreign company” means any company or body corporate incorporated outside India which
(a) has a place of business in India whether by itself/through an agent/physically/through electronic mode; and
(b) conducts any business activity in India in any other manner

CORPORATE SOCIAL RESPONSIBILITY
Section 135 Rules
‘…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’

Section 380 (1) (d)
Every foreign company shall have one or more persons resident in India authorised to accept notices, documents …by Registrar

Shroff: The definition of foreign companies clearly states that it is incorporated outside India. Section 1 of the Companies Act clearly says it applies only to the country of India and secondly it also says that who are covered it doesn’t cover a foreign company in the opening. Then when you go to the chapters and the Section 379, the whole of the chapter in relation to foreign bodies corporate clearly states that and it has a link with how the regulations in CSR are today. It basically says only those type of foreign companies which are 50 percent held by Indian entities, natural Indians or maybe bodies corporate any of them, those are the companies regulated by that entire chapter. That entire chapter in relation to Section 380 puts a prescriptive rule as to what they have to file and one of the key provisions stated therein that you must have a person resident in India to accept process of service and you need to appoint somebody who is sort of nominated by the company. If the chapter says the whole of the Sections relating to the foreign companies only applies where there is 50 percent ownership then it is that chapter which is relevant and not the definition of a foreign company. I am saying on both counts this fails. If it is not required to comply with Section 380 then the rule of having directors doesn’t exist and if the rule of director doesn’t exist the CSR committee cannot be constituted and the CSR constitution is not permissible because the Section doesn’t apply how can Section 135 apply.

CORPORATE SOCIAL RESPONSIBILITY
Section 379
Application of Act to Foreign Companies

If not less than 50% of paid-up share capital of a foreign company is held by one or more Indian entities

It shall comply with the provisions of this Chapter and such other provisions of this Act as may be prescribed with regard to the
business carried on by it in India as if it were a company incorporated in India

Doshi: Nonetheless the rules include foreign companies?

Shroff: It is ultra virus in my view.

Gupta: There is a subtle point, all the rules clarified is and intended basically is what Mr Shardul mentioned Section 379; the companies in which not less than 50 percent are held by Indians, let’s put it as a person, and there again they are saying there is a relaxation in the rule, one is nominated by the foreign company and secondly the person nominated under that chapter itself.

CORPORATE SOCIAL RESPONSIBILITY
Section 379
Application of Act to Foreign Companies

If not less than 50% of paid-up share capital of a foreign company is held by one or more Indian entities

It shall comply with the provisions of this Chapter and such other provisions of this Act as may be prescribed with regard to the
business carried on by it in India as if it were a company incorporated in India

Doshi: Yes, it says 380?

Gupta: Because there is an obligation in a manner of speaking. Therefore they had said that a committee can be formed easily and they are no taxing outside profit they are only saying business India profit, therefore one can draw a very fine distinction by applying the yardstick what Mr Shardul has mentioned, and trying to build a case for challenge but If you were to look at this entire objective in my end that what you are trying to tax and how you are going to tax you will find this is no different from a Mayor requiring you to spend that kind of money or explain.

Doshi: So I am going to end with quick 20 second wrap up comments from you. This is the first time where quite literally legislating a conscience whether you like it or not we expect you to contribute to society, is this going to work out well for India and India Inc or is this just going to become one yet another tick box thing through which 20 smart lawyers will find loopholes and ways to get around this, what do you think?

Gupta: My view is a moot point, it depends on the intention of the board if they really want to make a meaningful difference here is an opportunity, but if you don’t really want..... (interrupted)

Doshi: But both set wanted to make a meaningful difference were doing it even without Section 135, so I am wondering is Section 135 is going to benefit Indian society?

Gupta: Correct, but the only way it is helping the management and the board is that there is a approval in the manner of speaking that you can spend up to that extent.

Doshi: So now they don’t need to apologise to their shareholders for doing this, they say I am meeting a legal provision?

Gupta: Everybody wants to do it.

Shroff: They never apologise because they always assume that it is cognate and is in the nature of a business expenditure. The past shows that this was voluntarily done also because tax was not hostile. If the tax in the past years, and it is a prospective change this is not a retrospective change, is to apply from the next financial year. So almost all companies who have done CSR have claimed this as a business expenditure. There was a sweetener because the tax was not prohibited

Doshi: And that has gone on away now?

Shroff: Yes, therefore companies as he also says will rethink as to how this is going to impact the bottom line. So I agree decent lawyers, sensible lawyers would not go about challenging it but this sword on the head that yes, you can get a penalty, it maybe a fine of running into some few lakhs not crores. But yes, it taints your name giving back to society is part of our Indian culture but you can’t put a gun on the head and do it.

 
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