Form CSR-2: overlap in CSR reporting

corplaw@vinodkothari.com

MCA notification dated Feb 11, 2022 – https://www.mca.gov.in/bin/ebook/dms/getdocument?doc=MTE3OTE2OTE=&docCategory=Notifications&type=open

Our resources on the topic:

FAQs on CSR 2021 Amendments

Knowledge Centre for Corporate Social Responsibility (CSR)

Provision w.r.t. higher additional fees notified by MCA | Effective July 1, 2022

corplaw@vinodkothari.com

Our resources on corplaw: https://vinodkothari.com/category/corporate-laws/

FAQs on minority squeeze-out : Section 236 of the Companies Act, 2013

Last updated – 4th January, 2022

Relevant article on the subject can be read here – https://vinodkothari.com/2017/01/minority-squeeze-out-a-strong-new-provision-under-section-236-of-the-companies-act-2013/

Removal of Directors: A guide to forced exit of directors

Anushka Vohra | Manager and Ajay Kumar K V  | Manager  (corplaw@vinodkothari.com)

Introduction

Boards are seen as power-centres of a corporate entity. Hence, it is commonly seen that corporate disputes are often invoked out of and revolve around a certain section of shareholders seeking to seize directorship positions favouring the counter-set of shareholders.

Directors may be deprived of their office either due to disqualification, or due to circumstances leading to vacation of office, or resignation, or removal.

While the law, that is, the Companies Act, 2013 (‘CA, 2013’) has provisions around removal of directors, shareholder actions have been challenged in light of different interpretations being accorded to the provisions of Section 169 of CA, 2013 (which is akin to section 284 of the Companies Act, 1956) i.e. removal of a director, subject to certain conditions. However, courts keep facing certain reiterative but rather intriguing questions like – Whether the provisions are ‘exhaustive’ when it comes to removing a director? Whether shareholders constitute an omnipotent authority to dislodge the directors? Whether the board acting in its authority can remove a director without going to shareholders? Whether the removal of directors can happen in adherence to any other power of removal – say directors, nominator, or the like.

As a general rule, it is well accepted that the appointing authority shall have the power to remove a director from such office. However, the right of removal is not limited to the shareholders alone.

In this article, the authors have made an analysis of the ways in which a director can be removed from such office and the process to be followed for such removal.

Balance of powers between shareholders and directors

The CA, 2013 clearly demarcates the rights and obligations of shareholders and directors. The general administration of a company vests with the directors; they are the agents of a company and have a fiduciary duty towards the shareholders and all other stakeholders. The shareholders are referred to as owners of a company as they have their stake involved in the company.

Even though shareholders are the owners of the company, one cannot refute the fact that board of directors have an integral role in the routine affairs of a company and to keep the company as a going concern. Of late, there have been concerns as to whether the shareholders’ power to remove a director is an exceptional power. Essentially, there are following ways a director may be removed: statutory power of removal, a power of removal as per articles, a power of removal arising from terms of appointment, or a power of removal arising from terms of nomination.

The shareholders have been given a power under section 169 of the Act, that they may remove a director by passing an ordinary resolution. This power is usually exercised by the shareholders in situations where a director  is acting mala-fide and ultra-vires their authority. In any event, as we discuss below, the right of a shareholder to remove a director does not have to be explained by reasons.

Legislative history

The provisions relating to removal of a director first came into being after the Cohen Committee recommended  the same. The Cohen Committee was formed to recommend amendments to the Companies Act, 1929 (regulating the UK Company Law), which eventually formed the basis of the UK Companies Act of 1948. Section 184 of the Companies Act, 1948 provided for removal of directors. The same provided for obtaining shareholders approval by way of ordinary resolution, requirement of special notice. Sub-section(6) of section 184 states that- ‘nothing in this section shall be taken as depriving a person removed thereunder of compensation or damages payable to him in respect of termination of his appointment as director or of any appointment terminating with that as director or as derogating from any power to remove a director which may exist apart from this section.’

 

The same was retained under the Companies Act, 1985 and subsequently under the Companies Act, 2006.

There are certain jurisdictions which have empowered even the board of directors, by statute, to remove directors. For example, the Companies Act 71 of 2008 introduced into South African law a provision that, for the first time that empowers the board of directors to remove a director from office. The relevant extract of the same is as under:

‘(3) If a company has more than two directors, and a shareholder or director has alleged that a director of the company— (a) has become— (i) ineligible or disqualified in terms of section 69, other than on the grounds contemplated in section 69(8)(a); or (ii) incapacitated to the extent that the director is unable to perform the functions of a director, and is unlikely to regain that capacity within a reasonable time; or (b) has neglected, or been derelict in the performance of, the functions of director, the board, other than the director concerned, must determine the matter by resolution, and may remove a director whom it has determined to be ineligible or disqualified, incapacitated, or negligent or derelict, as the case may be.’

The granting of powers to the board for removal of directors is also a move towards ensuring a balance of powers among the two.

Under the  UK Company Law, section 168 contains the provisions relating to removal of directors whereby a company is duly empowered to do so, by ordinary resolution, prior to the expiration of a director’s term of office. S168, inter alia, states that “Nothing in this section shall be taken as … derogating from any power to remove a director which may exist apart from this section,”

The same has been applied in various judicial pronouncements. In the case of Bersel Manufacturing Co Ltd v Berry ([1968] UKHL J0508-2), an express stipulation in the articles that certain directors had the “power to terminate forthwith the directorship … by notice in writing”, was held to have been valid. Also, referring to the case of Nelson v. James Nelson and Sons, Ld.[1], the articles of association of the company in that case contained Article 84 which empowered the Board to exercise all the powers of the company subject to the limitations mentioned in the article, and Article 85 empowered the Board to appoint from time to time any one or more of their number to be managing director and with such powers and authorities, and for such period as they deem fit, and to revoke such appointment.

Provisions under the Act, 2013

As discussed above, section 169 of the Act contains provisions for removal of directors. Similar provisions were there under section 284 of the erstwhile Companies Act, 1956 (‘Erstwhile Act’). Such provisions require shareholders’ approval by way of ordinary resolution and the same is coupled with the stringent requirement of special notice. The removal of directors under section 169 can be summed as under:

  1. The company may remove a director through its shareholders, by ordinary resolution, other than one who has been appointed by the Tribunal under section 242 of the Act;
  2. Such removal should be done before the expiry of the period of office of the director sought to be removed;
  3. Special notice shall be given eligible shareholders;
  4. Circulation of the special notice;
  5. As a principle of natural justice, before removal, the concerned director should be given a reasonable opportunity of being heard. [refer below for detailed procedure]

S.169(8) – exhaustive method of removal?

Section 169 begins with the phrase “A company may, by Ordinary Resolution ………”. The use of the word ‘may’ under section 169 itself implies that the procedure for removal prescribed in Section 169 is not exhausted and there may be various other ways to remove a director.

It is also pertinent to note that section 169(8)(b) inter-alia states that –

(8) Nothing in this section shall be taken—

XXX

(b) as derogating from any power to remove a director under other provisions of this Act.

From above it could be interpreted that the company is not precluded from bringing any alternate method which could be carved out of the existing rigid statutory provision.

Rights under the AoA-

The Courts have been liberally interpreting the provision of section 169 to state that where the AoA bestows power on the board to remove directors, compliance with section 169 will not be required. We have referred to some judicial pronouncements hereunder:

In the case of Ravi Prakash Singh v Venus Sugar Limited[2], the Delhi High Court held that –

‘sub-section 7(b) of Section 284 lays down that nothing in the section shall be taken as derogating from any power to remove a director which may exist apart from this section. The section itself therefore contemplates removal of a director in addition to the provisions contained in the Section. Thus where the Articles of Association confer powers on the Board of Directors to remove the Managing Director or other directors, such power is not affected by the provisions of Section 284.’

( “Emphasis supplied”)

 

The scope of section 284 was also discussed in the case of A.K. Home Chaudhary v. National Textile Corporation[3] wherein the Allahabad High Court held that the powers of Board to remove a director is not barred by section 284-

‘the Petitioner was appointed a whole time director under Article 85(d) and his services have been terminated by the Board of Directors in exercise of their powers under Article 86(c). The Articles of Association do not place any fetter on the power of the Board of Directors to remove a director from service. The powers of the Board of Directors with regard to removal of Director remains unaffected by section 284 of the Companies Act. The impugned order of termination, therefore, is not violative of section 284 of the Companies Act. In the result, for the reasons stated above, we hold that the petitioner is not entitled to any relief.’

Contradicting judgements-

There have been contradicting views by the court in deciding who has the power to remove a director from the office wherein the provisions of section 284 were held to be comprehensive for the course of removal of a director. In the case of Hem Raj Singh v. Naraingarh Distillery Limited[4], the NCLAT held that-

‘It is stated that the removal was in complete contravention of section 284 of the old act as no specific notice was served upon the Appellant as per sub-clause 2 to 4 of section 284 of the old act.’

Distinction between s. 169 and s. 284

Akin to section 169, section 284 of the Erstwhile Act provided provisions relating to removal of directors. However, there is a change w.r.t. the alternate remedy which both sections provide. A comparative analysis of the same can be drawn as under:

Act, 2013 Erstwhile Act
Section 169. Removal of Directors

 

XXX

 

(8) Nothing in this section shall be taken-

 

XXX

 

(b) as derogating from any power to remove a director under other provisions of this Act.

Section 284. Removal of Directors

 

XXX

 

(7) Nothing in this section shall be taken-

 

XXX

 

(b) as derogating from any power to remove a director which may exist apart from this section.

The words, ‘which may exist apart from this section’ have been replaced by the words, ‘under any provisions of the Act.’ Does this provision have to necessarily be a statutory provision? Does this confer that right to removal under AoA of a company would be violative of section 169?

We are of the view that it is not necessary that there be a statutory provision, any power flowing from the AoA will also suffice. Referring to our detailed deliberations on the background and intent of the provision of removal of directors, it is clear that section 169 cannot be read de-hors of the background of section 284.

Further, we also refer to section 6 and 9 of the CA, 2013 and the Erstwhile Act, respectively, which states that-

Save as otherwise expressly provided in this Act—

XXX

(b) any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be.

While it is a settled proposition that the AoA cannot override the Act, however since there is a carve out under section 169(8), which may not necessarily be a statutory carve out, we understand that AoA of a company can provide for the powers of board to remove directors.

Intriguing questions w.r.t. Removal of directors by the shareholders

The process of removal of directors by the shareholders has various facets, of which the requirement of special notice is crucial. A question that arises is whether the special notice has to be accompanied with reasons for removal. In the case of LIC v. Escorts Limited[5], it was held that-

‘It is not necessary to give reasons in an explanatory statement for removal of a director as desired by section 173(2). Reason behind this judgement given by the court was that the company is acting on the basis of a special notice given by the shareholder u/s 284 and it is not a resolution proposed by the company.’ 

Process of removal of different directors

Under the provisions of Act, 2013 there are different types of directors viz. Executive Director(EDs),Non-Executive Director(NEDs), nominee director, additional director. The Law has made provisions for appointment and removal of all types of directors and differences lie in the method of appointment, authority for removal, etc. Below we analyse briefly the process for removal of different types of directors.

  1. EDs and NEDs- The process of removal of EDs and NEDs primarily be the same i.e.by the shareholders under section 169 or by the board of directors under powers bestowed by the AoA. In case of EDs, the terms of engagement may also be relevant to see for their removal.
  2. Nominee directors- The nominee directors can either be appointed by i.) a financial institution or ii.) by way of shareholders agreement. In the case of i.) above- it is an established principle of law that anybody vested with the power of appointment is also vested with the power of removal. The financial institutions or investors, generally referred to as nominators, ensures its representation on the board of the borrower company for the purpose of safeguarding their interest thereof. In the case of ii.) above the same view is held. We can also refer to a judicial pronouncement in this regard, in the case of Farrel Futado v State Of Goa And Others[6]  it was held that –

‘It is now a well-settled principle of law laid down by various decisions of the apex court, that the power of appointment includes the power of removal. The power of removal in the present case flows from the right of appointment by the Administrator under article 68(1) of the articles of association. Once this aspect is kept in mind, it is clear that the petitioner has not been removed by the board of directors under section 284 of the Companies Act. It is a re-call of the nomination by the Administrator under article 68(1) read with article 68(4) of the articles of association. As a nominee of the Government, the petitioner represented the largest shareholder in the company and the Government was entitled to revoke the said nomination/appointment as a matte of right which flowed from articles 68(1) and 68(4) with regard to non-rotational director appointed by the Administrator. Section 284 of the Companies Act deal with removal of directors by the company. It requires a company to pass an ordinary resolution to remove a director (not being a director appointed by the Central Government under section 408 of the Companies Act).’

XXX

‘The Government’s right to revoke the appointment under article 68(1) is not the same things as removal of a director by the company under section 284 of the Companies Act. The two operate in different spheres. If this dichotomy is kept in mind, it is clear that power to revoke the appointment made under article 68(1) flows from the power to appoint under article 68(1) and it has nothing to do with the removal of a director under section 284 of the Companies Act.’

3. Additional directors- The board of directors under the powers given by the AoA may appoint an additional director, and until their appointment is regularised by the shareholders at a general meeting, the board of directors can remove an additional director.

4. Managing Director- A managing director is appointed in a dual capacity, i.e. as a managerial personnel and as a director. As a managing director his terms of engagement are usually determined by way of a formal letter. Therefore, termination of the services of a managing director is within the powers of the board and section 169 shall not be referred to in this regard.

In the case of S. Varadarajan v. Venkateshwara Solvent Extraction (P) Ltd: : 1994 80 CompCas 693 Mad, (1992) IIMLJ 130[7], it was held that section 284 does not come in the way of removal of the managing director by the board. Similar decision was taken in the case of Major General Shanta Shamsher v. Kamani brothers: : AIR 1959 Bom 201, (1958) 60 BOMLR 1024, 1959 29 CompCas 501 Bom[8].

Whether special notice under section 115 requires compliance with section 111?

The special notice required under section 169 shall be given as per the provisions of section 115[9] wherein the eligibility criteria and the manner in which such notice of resolution shall be circulated to the members have been prescribed. However, the interesting question here is, whether such circulation to members shall be in compliance with section 111[10]?

The language of section 111 itself gives a direct connection with section 100[11] where it provides the eligibility criteria for giving a notice of resolution for circulation amongst the shareholders. It should also be noted that Sec.100 nowhere uses the term ‘special notice’.

Also, the eligibility criteria prescribed under section 115 is different from what has been provided in section 100 which is tabulated below:

Eligibility criteria under section 115 Eligibility criteria under section 100
●       Members holding not less than 1% of the total voting power or

●       Members holding shares on which such aggregate sum not less than 5 lakh rupees, as may be prescribed, have been paid up.

 

●       In the case of a company having a share capital;

○       Shareholders holding not less than 1/10th of the paid-up share capital of the company

●       In the case of a company not having a share capital;

○       Shareholders holding, on the date of receipt of the requisition, not less than 1/10th of the total voting power of all the members.

From the above, one can see that the threshold limit prescribed under section 115 is lower as compared to section 100. Thus, a lesser minority will be able to give a special notice for the removal of a director as compared to the requirements of section 100. The intent of the law also makes it more evident that these two provisions are separate and distinct from each other.

The subject matter of section 115 and section 111 are different wherein the former contains the provisions where the Act mandates a special notice for a resolution. However, the purpose under section 100 can be anything except what has been provided in section 115.

Further, section 111 requires that the shareholders shall deposit or tender with the requisition, a sum reasonably sufficient to meet the company’s expenses in giving the notice to all the shareholders of the company. However, there is no such requirement provided in section 115 read with Rule 23.

Under section115 and Rule 23, it has been specifically provided that notice of such requisition shall be given by the company to all the members or if it is not practical to give such notice, it shall be published in two newspapers having circulation at the place where the registered office of the company is located either in English language or in any other regional language of such place. But, there is no such provision in section 111 of the Act.

Also, section 140 of the Act also requires that a special notice is required for appointing a person as an auditor other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed. Such a special notice shall be given as per the provisions of section 115.

The views above have been upheld by the Hon’ble High Courts of India in multiple judgements as stated below:

In Gopal Vyas vs Sinclair Hotels And...: AIR 1990 Cal 45, 1990 68 CompCas 516 Cal[12] The Hon’ble High Court of Calcutta took the view that section 284 is a self-contained provision and the procedure is very specific for removal of a director. The court opined took the view that:

“The procedure for removal of a director has been specially provided in our Companies Act. Section 284 makes specific provision for such removal where special notice is required for any resolution of removal of a director or for appointment of somebody instead of that director so removed at the meeting at which he is removed.”

The view taken by Hon’ble Calcutta High Court in Gopal Vyas vs Sinclair Hotels was also upheld in Karnataka Bank Ltd. vs A.B. Datar And Others: 1994 79 CompCas 417 Kar, 1993 (2) KarLJ 230[13] by The Hon’ble Karnataka High Court:

“A comparative view of the two sections shows that section 284 is an independent provision providing for removal of directors and it is available for any shareholder for moving a resolution for removal of a director in meetings called by the company and there is nothing to insist on compliance with the provisions in section 188(2) to call a meeting to move a resolution as urged. Therefore, prima facie the view of the law to be taken having regard to the provisions of the two sections would be to hold that section 284 of the Companies Act is not subject to section 188 of the Companies Act and it is independent of that section..”

The court held that section 284 which provides for the removal of a director contains nothing to indicate that it is subject to section 188 of the Erstwhile Act.

Section 115 of the Act vs. Section 190 of Erstwhile Act

A comparative analysis of the current section and the provision of Esrtwhile Act also make it much clearer that the new section 115 has been refined to make it a complete procedure wherever the Act has prescribed that a special notice of the members shall be required for a resolution to be passed at a general meeting of the company.

Section 115 of the Act Section 190 of Erstwhile Act
●      Prescribes an eligibility criteria for shareholders to give special notice

●      Prescribes a cap of 3 months from the date of meeting for issue of such notice

●      Prescribes the languages in which the newspaper advertisement has to be published

●      Does not state any specific eligibility criteria

●      No upper limit has been provided.

●      Does not specify the manner of newspaper advertisement

Concluding remarks

On a perusal of the aforementioned judicial pronouncements, it can be seen that the removal of director from such office has multiple facets and it is not limited to the process as specified in section 169 of the Act alone. Where the articles of a company bestow upon the directors, the power of removal of a director, such right is unaffected by the provisions of section 169. It is also accepted in the courts that the removal of a director need not specify any reason for such removal to be mentioned in the Explanatory statement to a notice to the shareholders. Thus, the provisions of removal of directors can go beyond section 169 of the Act, 2013 and removal can be done by the board of directors in consonance with section 169 read with section 6 of the Act, 2013. Further, the special notice under section 169 shall be given as per section 115 read with Rule 23 and the provisions of section 111 read with section 100 shall not be applicable for such special notice.

[1] https://www.casemine.com/judgement/uk/5a8ff8c860d03e7f57ecd506

[2] https://indiankanoon.org/doc/1738210/

[3] https://www.casemine.com/judgement/in/5ac5e2bb4a932619d9021946

[4] https://indiankanoon.org/doc/149896839/

[5] https://indiankanoon.org/doc/730804/

[6] https://indiankanoon.org/doc/1477791/

[7] https://indiankanoon.org/doc/709945/

[8] https://indiankanoon.org/doc/1339373/

[9] Resolutions Requiring Special Notice

[10] Circulation of Members’ Resolution

[11] Calling of Extraordinary General Meeting

[12] https://indiankanoon.org/doc/1536641/

[13] https://indiankanoon.org/doc/458102/

Round-up of regulatory updates during 2021

We have attempted to collate all major regulatory amendments notified throughout the year, with our resources on the same. Below we present a regulatory round-up for the year 2021, be it for MCA, SEBI, RBI or the like, along with the links to our major articles/ FAQs on the same.

Our youtube video giving a quick view on the same can be accessed at – https://www.youtube.com/watch?v=WJbJx2jgK9A

This version: 4th December, 2021

Can companies avail GST benefits on CSR spending?

– By Harsh Juneja | Executive (corplaw@vinodkothari.com)

(Updated as on February 03, 2023 by Lovish Jain | Executive)

Background

Section 135(5) of the Companies Act, 2013 (‘the Act’) requires every eligible company [as per section 135(1)] to spend at least 2% of the average of net profits of immediately preceding 3 financial years towards Corporate Social Responsibilities(‘CSR’) activities. The CSR spending may sometimes include contributions made to NGOs or other beneficiaries, or money paid to implementing agencies. However, quite often, the expense may relate to procurement of goods or services which are applied to one or more CSR activities. This procurement of goods or services comes with the tax cost, viz., GST. So the question is, does this GST paid, while acquiring goods or services, give rise to an input tax credit, such that the same may be claimed as a set off? A related, and more important question is, whether CSR expense for the purpose of sec. 135 (5) be the amount net of the ITC, if the ITC is claimable, or the gross amount paid?

Input Tax Credit

Eligibility

Section 16(1) of the Central Goods and Service Tax (‘CGST Act, 2017’) prescribes the eligibility criteria for taking Input Tax Credit. It states that “Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”

Until the Budget 2023 announcement, there was no explicit provision clarifying the position whether input tax credit would be available for acquiring goods or services for carrying out CSR activities. In the Finance Bill, 2023, a proposal has been made for amendment in section 17 of the CGST Act, 2017 to disallow the availability of input tax credit for expenditure made towards CSR activities. Please refer to our article on the same

There have been rulings by Appellate Tribunal and Advance Rulings under GST w.r.t. the same.

Hon’ble CESTAT Mumbai, in the case of M/s Essel Propack Ltd. vs Commissioner of CGST, Bhiwandi, gave a view that the CSR gives a company an economically, socially and environment sustainability in the society in the long run, as a company can not operate without providing benefits to its stakeholders. Therefore, it held that if companies are unable to claim input services in respect of activities relating to business, production and sustainability of the companies themselves would be at stake.

Hon’ble High Court of Karnataka, in its judgement, in the case of M/s Commissioner of Central Excise, Bangalore vs. Millipore India (P) Ltd., also was of view that CSR Expenses are mandatorily incurred by employers towards benefit of the society and “to maintain their factory premises in an eco-friendly manner”. Therefore, the tax paid on such services shall form part of the costs of the final products and thus, the company can claim these taxes paid as input services.

Uttar Pradesh Authority for Advance Ruling (‘AAR’) in the matter of M/s Dwarikesh Sugar Industries Ltd held that a company is mandatorily required to undertake CSR activities and thus, forms a core part of its business process. Hence, the CSR activities are to be treated as incurred in “the course of business”.

Telangana State AAR in the matter of M/s. Bambino Pasta Food Industries Private Limited has clearly held that expenditure made towards CSR, is an expenditure made in the furtherance of the business. Hence the tax paid on purchases made to meet the obligations under CSR will be eligible for ITC. 

Section 135(7) is a penal provision under the Act which deals with penalty on non-compliance of section 135(5)  and (6). It was observed by the AAR that a Company fulfilling eligibility criteria under section 135(1) of the Act is required to mandatorily spend towards CSR and thus, must comply with these provisions to ensure smooth run of business.

Thus, Uttar Pradesh AAR held that the expenses incurred by the Company in order to comply with requirements of CSR under the Act qualify as being incurred in the course of business and are eligible for ITC in terms of the Section 16 of the CGST Act, 2017.

Contrary ruling: Free Supply of Goods

Section 17(5)(h) of the CGST Act excludes “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples” for the purpose of availing ITC on payment of GST. The term ‘gift’ is not defined anywhere in the CGST Act. However, in layman’s language, gift means a thing given willingly to someone without payment.

In the matter of M/s. Polycab Wires Private Limited, Kerala AAR held that distribution of necessaries to calamity affected people under CSR expenses shall be treated as is if they are given on free basis and without collecting any money. Hence, for these transactions, it was held that ITC shall not be available as per section 17(5)(h).

However, a contrast has been drawn in the Uttar Pradesh AAR Ruling towards goods given as ‘gift’ and given as a part of CSR activities. Gifts are voluntary and occasional in nature whereas CSR expenses are obligatory and regular in nature. AAR held that since CSR expenses are not incurred voluntarily and have to be incurred regularly, they are not to be treated as ‘gift’ and thus, should not be restricted under section 17(5)(h) for claiming ITC.

One may also refer to explanation 2 to Section 37(1) of Income Tax Act, 1961, as also cited by Hon’ble High Court of Delhi in the matter of Pr. Commissioner of Income Tax vs. M/s Steel Authority of India Ltd which provides that, any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred for the purposes of the business or profession.

Availing Benefit through Beneficiary

A company contributes a sum towards a beneficial organisation such as NGOs, Charitable Trusts and Section 8 Companies (‘implementing agencies’) towards fulfillment of CSR activities. However, these implementing agencies also need to hire services of vendors to complete these activities. These vendors charge GST on the services rendered by them. Since these implementing agencies often do not generate any output, the question raises can these organizations also claim ITC on the services rendered by them?

There is a concept of ‘pure agent’ in GST. Explanation to Rule 33 of CGST Rules, 2017 prescribes that a pure agent means a person who –

The implementing agencies fulfill this eligibility criteria of being a ‘pure agent’. Rule 33 also contains some conditions on the fulfilment of which, expenses incurred by the supplier as a pure agent of the recipient of the supplier of goods or services, are excluded from the value of supply-

In our case, if an implementing agency avails any goods or services from a vendor to fulfil the CSR activities for a company, then the payment of any such amount to the vendor shall be treated as a supply made as a pure agent by the implementing agency on behalf of recipient of supply, i.e., the company. Thus, these expenses incurred by the implementing agencies shall be excluded from the value of supply and therefore, are not liable for payment of GST.

CSR Contribution: Pre-GST or Post-GST?

The Act does not clarify that the amount to be contributed towards CSR activities should be inclusive or exclusive of taxes. However, it seems that since GST is charged on supply of goods and services, irrespective of the intention of social benefit, the amount contributed towards CSR can be both inclusive and exclusive of GST. Having said that, the question still pertains on the inclusivity of the amount of GST paid towards the amount of CSR expenditure for the purpose of section 135(5) of the Companies Act, 2013.

Conclusion

While the rational view would be, expenses incurred on GST for fulfilment of CSR activities should be eligible for claiming input tax credit, however, the Finance Bill, 2023 proposes otherwise. The effective date of the amendment will be 1st April 2023. Hence, once the Budget proposals are passed, any acquisition of goods or services for CSR purposes will be denied the benefit of GST set off. So the next question is whether the CSR expenditure would be inclusive of GST. We deal with the same citing illustrations in our article.

Unspent CSR & Role of IAs

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Other ‘I am the best’ presentations can be viewed here

Business Responsibility and Sustainability Reporting

Business Responsibility and Sustainability Reporting

Other ‘I am the best’ presentations can be viewed here

Our other resources on related topics –

  1. https://vinodkothari.com/2021/06/brsr-reporting-actions-and-disclosures-required-for-business-sustainability/
  2. https://vinodkothari.com/wp-content/uploads/2020/08/Cartload-of-details-in-BRSR.pdf
  3. https://vinodkothari.com/2020/08/brr-in-process-to-become-a-fully-loaded-electronic-form/
  4. https://vinodkothari.com/2016/01/global-overview-of-business-responsibility-reporting/

Our resource center on Business Responsibility and Sustainable Reporting can be accessed here –
https://vinodkothari.com/resource-center-on-business-responsibility-and-sustainable-reporting/

RBI Guidelines at odds with the Companies Act on appointment of Auditor

A comparative analysis between the Companies Act, SEBI Guidelines and SEBI Circular dated 18th Oct. 2019

– Ajay Kumar K V | Manager (corplaw@vinodkothari.com)

Introduction

The Reserve Bank of India has issued Guidelines[1] for Appointment of Statutory Central Auditors (SCAs)/Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs and NBFCs (including HFCs) under Section 30(1A) of the Banking Regulation Act, 1949, Section 10(1) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980 and Section 41(1) of SBI Act, 1955; and under provisions of Chapter IIIB of RBI Act, 1934 for NBFCs, on 27th April 2021.

The Guidelines provide for appointment of SCAs/SAs, the number of auditors, their eligibility criteria, tenure and rotation as well as norms for ensuring the independence of auditors.

However certain provisions of these Guidelines are either completely different or stringent as compared to the provisions of the Companies Act, 2013 (Act). Further, in case of listed entities the question would arise whether the SEBI circular CIR/CFD/CMD1/114/2019[2] dated 18th October 2019 shall be applicable, where the existing auditor is ineligible to continue as the auditor of the company and a new auditor is to be appointed.

In this write up, we have discussed the requirements under both RBI Guidelines as well as the Act.

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MCA circular on excess spent done by contribution to PM-Cares

-raises more questions than it settles.

Nitu Poddar, Senior Associate ( corplaw@vinodkothari.com )

Setting off excess-spent on CSR

Pursuant to Rule 7(3) of the CSR Rules, 2014, a company is allowed to take benefit of the excess amount (more than the requirement under section 135(5) spent by it on CSR activities upto three succeeding financial years. This provision has come into effect from January 22, 2021.

Accordingly, the common view that has formed is that only amount that is spent in excess on and from January 22, 2021 can be set off against the CSR obligations of three succeeding year. However, the second view, and the more appropriate one is, even amount spent in excess before Jan 22, 2021 may also be set-off against the CSR obligations of a year, subject to such excess spent is done within three years of taking such set-off. That is to say, any excess spent done in FY 2019-20, 2018-19, 2017-18 could have been set-off in FY 2020-21.

The reason for the second view is that, all that the provisions of Rule 7(3) allows is “setting off “the excess spent, which is being done post January 22, 2021. 

Clarification Circular by MCA:

MCA, on May 20, 2021, has issued a Circular, purportedly clarifying the following:

  1. Any amount spent in excess during FY 2019-20;
  2. On March 31, 2020;
  3. By contribution to the PM-Cares

may be set off against the CSR obligation for FY 2020-21 (only) subject to the following conditions:

  1. Unspent amount, if any, of the previous years, should have been factored;
  2. CFO and statutory auditor to certify that such amount was
    1. contributed on 31.03.2020;
    2. pursuant to the appeal by the MCA.
  3. Details of such contribution to be disclosed separately in the CSR Report and Board’s Report. 

Issues arising from the Circular

The MCA Circular rather raises several questions and leave then unanswered:

  1. What about the contribution done prior to 31.03.2020?;
  2. What about the excess spent done in any other activity as mentioned in schedule vii?;
  3. What about the excess spent done in FY 2018-19 and 2017-18?
  4. Why a certificate from statutory auditor? This is not required for any other excess spent done neither is this part of Rule 7(3).

The Circular seems to support the view of the ICSI, as mentioned in Q-47 of the FAQ released on April, 29, 2020, which says that only excess spent done after January, 22, 2021 may be allowed to set-off in subsequent years. However, taking such view would may not be the correct interpretation of the applicability of the provisions.

 

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