Corporate Social Responsibility (CSR) and Implementation Agencies | Legal Analysis

Table of Contents:

1. Background
2. Types of Implementing agency
3. Implementation through company/trust/society established by the company
4. Implementation through Company/Trust/Society established by Government, etc.
5. Entity established under an Act of Parliament
6. Implementation through other Company/Trust/Society
7. CSR Registration
8. All projects can be implemented Through implementing agencies
9. Implementation may involve acquisition of a capital asset
10. Restrictions under the Act/Rules are applicable to implementing Agencies
11. Monitoring by Board and certificate by Chief Financial Officer

Check out Taxmann's Corporate Social Responsibility Law & Practice which provides comprehensive analysis with illustrations on CSR Provisions in the Companies Act & the Companies CSR Rules. It also includes updated CSR compliance requirements, insights on complex topics, accounting aspects & income-tax provisions, etc.

Relevant provisions

Section 135(5), 135(6), rule 4(1), rule 4(2), rule 4(5), rule 7(4)

1. Background

A company can implement its CSR activities through implementing agencies [rule 4(1)] (hereinafter referred to as “implementing agency” or “implementing entity”). This article explains the provisions regarding such implementing agencies.

2. Types of Implementing agency

Implementation can be through any one or more of the four different types of entities mentioned below:

(a) Company/trust/society established by the company

(b) Company/Trust/Society established by Government, etc.

(c) Entity established under an Act of Parliament, etc.

(d) other Company/Trust/Society

Each of the above is explained in the following paragraphs.

3. Implementation through company/trust/society established by the company

A company may implement its CSR activities through an entity which satisfies the following conditions:

(a) the entity is a

(i) section 8 company; or

(ii) registered public trust; or

(iii) registered society.

(b) it is established by the company either singly or along with any other company.

(c) it is registered under sections 12A and 80G of the Income-tax Act, 1961.

(d) it is registered with Central Government under CSR Rules

[rule 4(2)(a)]

Although not expressly mentioned, a company licensed under section 25 of the Companies Act, 1956, is also covered [by virtue of section 465(2)(g) of the Act regarding repeal of the Companies Act, 1956].

3.1 Registration under section 12A and section 80G of the Income-tax Act, 1961

The requirement of registration under section 12A and approval under section 80G should be considered as applicable to all the three types of entities namely, company, trust and society. This is explained below:

(a) Rule 4(1)(a) reads as follows:

The Board shall ensure that the CSR activities are undertaken by the company itself or through

(a) a company established under section 8 of the Act, or a registered public trust or a registered society, registered under sections 12A and 80G of the Income-tax Act, 1961 (43 of 1961), established by the company, either singly or along with any other company.

Thus, there is a comma after “the Act” and “registered society”. The placement of two commas suggests that the expression “registered under section 12A” cannot be said to qualify only a registered society.

(b) The Form CSR-1 for registration of entities with Central Government for undertaking CSR activities requires information regarding nature of entity (at Sr. No. 1). It refers separately a section 8 company, a society, and a trust and for each of them it requires registration under section 12A/80G.

(c) The MCA has clarified that all three types of entities – a company established under section 8 of the Act, or a registered public trust, or a registered society are required to have income-tax registration u/s 12A as well as 80G of the Income-tax Act, 1961 to act as implementing agency … [Response to Q.5.3 in General Circular No.14/2021 dt. 25th August 2021, issued by the MCA].

3.1A Registration under section 12AB

The rule refers to section 12A of the IT Act, 1961, whereas with effect from 1st April 2021, the registration is granted under section 12AB of the said Act. It appears that an entity registered under section 12AB also qualifies as an implementing agency for the purposes of rule 4(1).

The timeline for application for registration under section 12AB or section 80G has been extended to 31st March 2022 (CBDT Circular No. 16/2021 dt. 29th August 2021).

3.1B Approval under section 10(23C) is not sufficient

The IT Act, 1961 allows approval under section 10(23C) in certain cases as an alternative to registration under section 12A/12AB. However, for rule 4(1), such approval under section 10(23C) is not sufficient.

3.1C Entities which cannot be approved under section 80G

The following entities cannot be approved under section 80G of the IT Act, 1961:

(a) An entity expressed for the benefit of any particulars religious community or caste;

(b) an entity which incurs expenditure of a religious nature for an amount exceeding 5% of its total income.

Such entities are not covered by rule 4(1).

3.1D Private trust

A private trust which cannot be registered under section 12A/80G of the IT Act, 1961 is not permitted to carry on CSR activities.

3.2 “Registered” Trust – Meaning

The amended rule states “a registered public trust or a registered society, registered under sections 12A and 80G …”. What is the meaning of “registered”? Is registration under the IT Act, 1961 sufficient? On a literal reading, if registration under the IT Act, 1961 was sufficient, it would not have been necessary to state the word “registered” twice: the rule could have stated either

(a) registered public trust or a registered public society established by the company; or

(b) a public trust or a society, registered under section 12A and section 80G.

However, the MCA has clarified that “‘Registered Trust’ … would include trusts registered under Income-tax Act ,1961, in respect of those States where registration of public trusts is not mandatory” [Response to Q.5.4 in General Circular No.14/2021 dt. 25th August 2021]. From this, it could be inferred that a trust will be regarded as registered if it is registered

(a) under the relevant State Statute where registration of a trust under such statute is mandatory; and

(b) under the Income-tax Act, 1961, in those States where such registration is not mandatory.

Further, in aforesaid situations, it is not necessary that the trust document should be registered under the Indian Registration Act, 1908.

3.3 Society

It is not clear as to whether the term “society” is restricted to a society registered under the Societies Registration Act, 1860 or does it include a co-operative society.

3.4 Directors/shareholders can become trustees, etc.

There is no prohibition against directors/shareholders of the company becoming trustees in the trust or members of governing body of the society or directors/members in the company so established by the company, as the case may be.

3.5 Track record not required

The entity so established by the company need not have established track record of three years in undertaking similar programmes/projects.

3.6 Established – Meaning

The entity must be “established” by the company either singly or along with any other company. The word ‘established’ has been explained in other contexts as follows:

(a) The meaning of the word ‘establish’ as given in the New Collins Concise Dictionary, 1983 Edition, is: 1. to make secure or permanent in a certain place, condition, job etc. 2. to create or set up (an organisation etc.) as on a permanent basis. According to Webster’s Comprehensive Dictionary (International Edition), the word ‘establish’ means: 1. to settle or fix firmly; make stable or permanent. 2. to set up; found, as an institution or business. 3. to set up install (oneself or someone else) in business, a position, etc.

Thus in our view, on precept and otherwise, the law is firmly ingrained and placed on a firm footing that before a Gurdwara or an institution could be declared a Sikh Gurdwara, it must be established that it was founded at its inception by the Sikhs for public worship.

[Shiromani Gurdwara Prabandhak Committee v. Mihan Singh (1993) 3 SCC 650⁵²]

(b) In Shorter Oxford English Dictionary, Third Edition, the word “establish” has at number of meanings, i.e. to ratify, confirm, settle, to found, to create. Here again founding is not the only meaning of the word “establish” and it includes creation also. In Webster’s Third New International Dictionary, the word “establish” has been given a number of meanings, namely, to found or base squarely, to make firm or stable, to bring into existence, create, make, start, originate.

[S. Azeez Basha v. UOI AIR 1968 SC 662⁵³]

Thus, the entity is regarded as established by the company undertaking CSR activities if it is created or founded by the said company.

A section 8 company will be regarded as established by a company only if the company is subscriber to the memorandum of association of the section 8 company. A private company needs at least two subscribers. In such a case, apart from the company undertaking the CSR activity, another person would also be required to be a subscriber. It appears that mere presence of such another person as subscriber (for meeting the requirement regarding minimum number of members) would not mean that the section 8 company is not established by the company undertaking the CSR activity.

In case of a trust, the company should be a settlor of the trust. This is because a trust can be said to be established only by the settlor.

For a society, the company should be a subscriber to the memorandum of association.

3.7 An entity established by subsidiary of the company is not covered

The entity must be established by the company and hence, the CSR project of the company cannot be implemented through an entity established by any other company, including its holding company or subsidiary.

3.8 Implementing entity for collaborating companies

A company may collaborate with other companies for undertaking CSR projects or programmes [rule 4(4)]. In such a case, if the collaborating companies wish to implement the CSR programme through an entity referred to in this clause, it is necessary that all the collaborating companies should have established it. In other words, all the companies should be subscribers to the Memorandum of Association of the company/society under the Society Registration Act, 1860 or settlor of the trust, as the case may be.

3.9 Interested party

3.9A The company would become an interested party of the implementing entity under section 13(3)(a) of the Income-tax Act, 1961.

A consequence of this is that the funds or property of the entity cannot be used for the benefit of the company [section 13(1)(c) of the Income-tax Act, 1961]. Further the services rendered by the entity to the company must be on an arm’s length basis with adequate remuneration for the entity [section 13(2)(d)].

The entity may not get any mark-up from the company for implementing the CSR project of the company. According to one view, this being a statutory requirement under the Act undertaken by the entity in fulfilment of its charitable objects, it cannot be said that the entity has not charged adequate remuneration. The other view is that there is no express prohibition under the Act or the Rules on the implementing agency charging a mark-up. At the highest, such mark-up may not be regarded as CSR Expenditure. However, this does not mean that the implementing agency should not charge adequate remuneration.

The matter is not free from doubt and the safer view is that the implementing agency should charge a mark-up, which would also include recovery of overheads.

3.9B Related party under the Act

The entity so established could be a related party of the company under section 2(76) of the Act.

3.10 CSR Registration

The entity must be registered with the Central Government [rule 4(2)]. For details, please see heading 7.

4. Implementation through Company/Trust/Society established by Government, etc.

A company may implement its CSR activities through an entity which satisfies the following conditions:

(a) the entity is a

(i) section 8 company; or

(ii) a registered society; or

(iii) a registered trust.

(b) the entity is established by the

(i) Central Government; or

(ii) State Government.

[rule 4(1)(b)]

4.1 Track record not required

The entity need not have an established track record of three years in undertaking similar programme or projects.

4.2 Registration under the Income-tax Act, 1961 is not required

The requirement to be registered under sections 12A and 80G of the Income-tax Act, 1961 is not applicable to such an entity. However, having regard to the fact that a trust or society established by the Government must be “registered”, it should be either registered under section 12A of the IT Act, 1961 or the trust/society document should be registered under the Indian Registration Act, 1908. Further, the entity needs to obtain CSR Registration Number from MCA under rule 4(2) before undertaking CSR activities.

Since the trust/society established by the Government need not be registered under the IT Act, 1961, on a literal reading, it need not satisfy the definition of “charitable purpose” in section 2(15) of the IT Act, 1961 and even a “private trust” created by the Government is covered by rule 4(1).

4.3 Registered Trust

Please see heading 3.2.

4.4 Society

Please see heading 3.3.

4.5 “Established”- Meaning

Please see heading 3.6 regarding manner of establishing the entity.

4.6 CSR Registration

Please see heading 7.

5. Entity established under an Act of Parliament

A company may implement its CSR activities through an entity established under an Act of Parliament or a State Legislature.

5.1 Entity need not be company/trust/society

The entity need not be a company or a trust or a society.

5.2 Track record not required

The entity need not have any established track record of three years in undertaking similar programmes/projects.

5.3 Established “under an Act”

The term “under an Act” is judicially explained in other contexts as follows:

(a) The words under the Act “would, in that context, signify what is not directly to be found in the statute itself but is conferred or imposed by virtue of powers enabling this to be done; in other words, by laws made by a subordinate law-making authority which is empowered to do so by the parent Act.

[Dr. Indramani Pyarelal Gupta v. W. R. Nathu AIR 1963 SC 274⁵⁴]

(b) the expression “under the Act” can only mean “authorized by the Act”

[Rabindra Nath Mahapatra v. Gour Mondal AIR 1957 Cal 274⁵⁵]

(c) an act done under the Act is an act expressly or specifically required or permitted to be done by the Act; no act, which is not referred to in the Act, can be said to be an act done under it.

… A statute generally requires or permits positive acts to be done and, therefore, usually it would be a positive act that amounts to an act done under the Act. A negative act or omission cannot amount to an act done under an Act unless it expressly enjoins or permits the non-doing or Omission.

[Lucknow Nagar Mahapalika v. Karamjeet Singh AIR 1962 All 174⁵⁶]

5.4 Registered

The requirement to be registered under sections 12A and 80G of the Income-tax Act, 1961 is not applicable to such an entity. However, it needs to obtain CSR Registration Number from MCA under rule 4(2) before undertaking CSR activities.

5.5 CSR Registration

Please see heading 7.

6. Implementation through other Company/Trust/Society

A company may implement its CSR activities through any other

(a) section 8 company;

(b) registered trust;

(c) registered society.

In other words, such an entity need not have been established by the Company. (please see heading 3) or by the Government (please see heading 4/5) [rule 4(1)(d)].

However, the entity must

(a) be registered under sections 12AB and 80G of the IT Act, 1961;

(b) have an established track record of at least three years in undertaking similar programme or projects;

(c) be registered with Central Government under CSR rules.

6.1 Registration under the IT Act, 1961

Please see heading 3.1.

6.2 Registered trust

Please see heading 3.2.

6.3 Society

Please see heading 3.3.

6.4 Established by subsidiary or holding company

The entity may be established by any person, including subsidiary or holding company of the company undertaking CSR activity.

6.5 Track record

The entity must have an ‘established track record’ of at least three years.

In the context, “established” could mean “accepted, proven or recognised”.

The term ‘track record’ has been defined in dictionaries as follows:

(a) https://dictionary.cambridge.org

noun

• • • • all the achievements or failures that someone or something has had in the past:
      • all of the successes and failures of a person or organization considered together;
      • all the past achievements or failures of a person or organization, considered together:

(b)  https://www.merriam-webster.com

noun

• • • • a record of past performance often taken as an indicator of likely future performance
      • the things that someone or something has done or achieved in the past regarded especially as a way to judge what that person or thing is likely to do in the future

In view of the above, an entity could be said to have “established track record” in undertaking similar activities if it has

(a) successfully undertaken similar activities in the past; and

(b) such an achievement is accepted or proven.

6.5A Year

The track record should be of at least three ‘years’. For this purpose ‘year’ should mean a period of 365 days and not a calendar year, which is the definition of ‘year’ in section 3(66) of the General Clauses Act 1897.

6.5B Undertaking “similar” activities

The track record should be in undertaking ‘similar’ activities.

The word ‘similar’ has been judicially explained in other contexts as follows:

(a) The word ‘similar’ connotes that the payment made to the assessee need not be in the nature of royalty, commission or fees only; it could be any payment of like nature…

[Continental Construction Ltd. v. CIT (1992) 60 Taxman 429/195 ITR 81 (SC)⁵⁷]

(b) The expression “similar” is a significant expression.It does not mean identical but it means corresponding to or resembling to in many respects; somewhat like; or having a general likeness. The statute does not contemplate that goods classed under the words of ‘similar description’ shall be in all respects the same.

[Nat Steel Equipment Pvt. Ltd. v. CCE (1988) 69 STC 58 (SC)⁵⁸]

(c) Oxford English Dictionary, Volume IX, of the definition, reads as under:

“Having a marked resemblance or likeness of a like nature or kind.”

          In Words and Phrases, Volume 39, this word has been defined as under:–

“‘Similar’ means nearly corresponding; resembling in many respects; somewhat like; having a general likeness. Royer v. Brown, N.H. 93 A. 2d 667, 668. The word ‘similar’ in its primary sense means nearly corresponding, resembling in many respects, somewhat like, having a general likeness. Rubenstein v. Firemen’s Fund Ins. Co. N.E. 2d 289, 291, 339 III App. 404.

[Sham Dass v. The Financial Commissioner AIR 1973 P&H 50⁵⁹]

Thus, the entity should have track record in undertaking activities which are resembling, or somewhat like the CSR activities specified in Schedule VII. Further, if the entity has merely given donations to other institutions engaged in activities specified in Schedule VII, it cannot be said that it has track record of under taking similar activities.

The rule does not state with which activities should the entity’s past activities be compared to decide whether they are ‘similar’. Having regard to the object and context, it appears that the comparison must be made with CSR activities specified in Schedule VII.

6.6 Company could be an interested party

The company could be an interested party of the entity under section 13(3)(a) of the IT Act, 1961. Also see heading 3.9.

Directors/shareholders of the company could be trustees/directors/member of the implementing entity so formed.

6.7 CSR Registration

Please see heading 7.

7. CSR Registration

Every entity, covered under rule 4(1), which intends to undertake any CSR activity, has to mandatorily register itself with the Central Government with effect from the 1st April 2021 [rule 4(2); response to Q.5.6 in General Circular No.14/2021 dt. 25th August 2021, issued by the MCA].

The registration requirement is obviously not applicable if the company carries out CSR activities directly [see response to Q. 5.8 in General Circular No.14/2021 dt. 25th August 2021, issued by the MCA].

The registration application is to be made in Form CSR-1.

7.1 Purpose of registration

The MCA has clarified as follows:

The identification of suitable implementing agencies is a major concern for companies. Registration of implementing agencies on MCA 21 portal is aimed at creating a database of such agencies for companies who may want to engage them. Further, this will bring accountability and transparency in the implementation of CSR activities and thereby strengthen the CSR eco-system.

7.2 Projects approved prior to 1st April 2021 need not be registered

The registration requirement is not applicable to CSR projects or programmes approved prior to the 1st April 2021. Therefore, for a project commenced prior to 1st April, 2021, the implementing agency is not required to file Form CSR-1. For this purpose, approval mean approved by the Board of Directors and projects includes ongoing project. [see response to Q.5.7 in General Circular No.14/2021 dt. 25th August 2021, issued by the MCA].

Illustration

A company commences CSR project “A” through an implementing agency “C” during financial year 2020-21. It proposes a new CSR project “B” in financial year 2021-22 through another implementing agency “D”. The implementing agency “D” will have to register itself for project “B” by filing form CSR-1. However, for project “A”, which is an ongoing project, the implementing agency “C” is not required to file form CSR-1.

7.3 Sequence

In terms of sequence, the registration under section 12AB would be required before the company makes an application in Form CSR-1 for registration with the registrar under rule 4(2).

7.4 No last date for registration

There is no last date for registration under rule 4(2). The only restriction is that in respect of projects on or after 1st April 2021, the CSR activity cannot be implemented through an entity, which is not registered under rule 4(2).

8. All projects can be implemented Through implementing agencies

All projects, including ongoing projects, can be implemented through implementing agencies once the Board approves a project [response to Q.6.5 in General Circular No.14/2021 dt. 25th August 2021, issued by the MCA].

9. Implementation may involve acquisition of a capital asset

CSR amount may be spent by a company for creation or acquisition of a capital asset, which shall be held by –

(a) a company established under section 8 of the Act, or a Registered Public Trust or Registered Society, having CSR Registration Number under rule 4(2); or

(b) beneficiaries of the said CSR project, in the form of self-help groups, collectives, entities; or

(c) a public authority:

[rule 7(4)]

In respect of any capital asset created and held by it prior to the commencement of the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021, the company shall, within a period of 180 days from such commencement comply with the requirement of this rule. The period of 180 days may be extended by a further period of not more than 90 days with the approval of the Board based on reasonable justification [proviso to rule 7(4)].

A Public authority means ‘Public Authority’ as defined in section 2(h) of the Right to Information Act, 2005 [rule 2(1)(j)]

10. Restrictions under the Act/Rules are applicable to implementing Agencies

All restrictions applicable to the company would apply to the implementing agencies through which CSR activity is carried on. To illustrate, the agency cannot carry on activity which is in the normal course of business of the company [rule 2(1)(d)(i)].

To ensure compliance with the restrictions applicable to the company,

(a) it is advisable that a detailed agreement is to be drawn up.

(b) the agency should be required to maintain robust documentation as specified in the agreement.

11. Monitoring by Board and certificate by Chief Financial Officer

The Board of a company must satisfy itself that the funds “so disbursed” have been utilised for the purposes and “in the manner” as approved by it and the CFO or the person responsible for financial management shall have to certify to the effect [rule 4(5)].

The phrase “in the manner” suggests that the Board has not only to specify the purposes for which the funds disbursed are to be utilised but also specify the way in which such utilisation shall happen. To illustrate, suppose the implementing agency has been asked to utilise the CSR fund for a tree plantation project, the board will have to also specify the manner in which the project will be implemented, that is, the area in which the trees are to be planted, who will be responsible for the safety of the trees, whether the trees will be planted with organic or chemical fertilizer, etc.

11.1 Rule 4(5) may not apply when the company itself undertakes CSR activities on its own

It could be argued that the aforesaid rule 4(5) is applicable in respect of implementation through implementing agencies or when a company collaborates with other companies for undertaking CSR projects but not when the company itself undertakes CSR activities directly on its own. In other words, the monitoring and certificate requirements are applicable when projects are implemented through implementing agencies or in collaboration with other companies. This is explained in subsequent paragraphs:

(a) Rule 4(5) uses the expression “so disbursed”. The word “so” is judicially explained as follows:

(i) First limb of the Explanation to s. 3(1) of the Customs Tariff Act, 1975 clarifies that the duty chargeable u/s. 3(1) would be the excise duty for the time being leviable on a like article if produced or manufactured in India. The second limb to the Explanation deals with a situation where a like article is not so produced or manufactured. The use of the word ‘so’ implies that the production or manufacture referred to in the second limb is relatable to the use of that expression, i.e., the excise duty for the time being leviable on a like article if produced or manufactured in India, in the first limb which is of a like article being produced or manufactured in India.

[Hyderabad Industries Ltd. v. UOI (1999) 108 ELT 321 (SC)]

(ii) In Law Laxicon by P Ramamnatha Aiyar, word ‘so’ means in this manner or degree. “So COMPLETED” or “so ALTERED” imports the doing of the thing in the manner and so as to satisfy the requirements previously prescribed (per SMITH, J., G.Q. Ry v. Halesowen Ry. 52 LJQB 479).

[Bal Kishan Bansal v. Pramit Bansal Son of Devki Nandan Bansal AIR 2006 All 305⁶⁰]

(iii) The adverb “so” is defined by Webster as meaning “in the same manner; has bas been stated; in this or that condition or state; under these circumstances; in this way; with reflex reference to something just asserted.” This is the ordinary way the word is understood, and it must be taken to mean the same thing when used in an indictment.

[Blanton v. State, 24 P. 430, 1 Wash. 265]

Thus, the word “so” refers to something previously stated. Now, rule 4(5) evidently does not state anything before the word “so” which could be relatable to it. However, the preceding rule 4(1) to 4(4) refer to implementing agencies and projects in collaboration with other company/ies. Hence, when the rule 4(5) uses the expression “so” disbursed, it refers to so disbursed under rule 4(1)/4(4).

 

---

52. For the purpose of the Sikh Gurdwara Act, 1925
53. For the purpose of Article 30(1) of the Constitution of India concerning right to minorities to “establish” and administer educational institution
54. For the purpose of section 3 of the Forward Contracts (Regulation) Act, 1952 providing that the Forward Markets Commission may discharge such duties as may be assigned to it by or “under this Act”.
55. For the purpose of the West Bengal Bargadars Act, 1950.
56. For the purpose of Sections 97(1), 2(7), 65 and 66 of U.P. Town Improvement Act, 1919.
57. For the purpose of section 9(1)(vi) of the Income-tax Act, 1961
58. For the purpose of Explanation I to tariff item No. 33C in the Classification List under the Central Excises and Salt Act, 1944
59. For the purpose of section 18 of the Punjab Security of Land Tenures Act, 1953
60. For the purpose of section 8 of the Arbitration and Conciliation Act, 1996