Under the Companies Act, 2013, CSR (Corporate Social Responsibility) expenditure must be incurred on activities specified in Schedule VII. Whether an event qualifies as CSR expenditure depends on its primary purpose and alignment with the approved social objectives.

Key Points to Consider:

• Qualifying CSR Activities:
  The activities eligible for CSR spending are clearly outlined in Schedule VII. They typically include initiatives related to education, health, rural development, environmental sustainability, and other social welfare projects.

• Purpose of the Event:

  • Marathons:
    If organized to promote community health, fitness, or environmental awareness, a marathon may be considered CSR expenditure. However, if it’s mainly used as a promotional or branding event, it may not qualify.
  • Awards Ceremonies:
    Awards given to recognize contributions toward social causes can be included, provided the primary objective is to further a social welfare activity.
  • Advertisements and TV Sponsorships:
    These expenditures are generally seen as marketing or promotional expenses. Unless they are directly linked to a social initiative outlined in Schedule VII (for example, creating awareness about a social cause), they would not be considered CSR expenditure.

• Documentation and Approval:
  Any expenditure claimed under CSR must be supported by proper documentation and approved by the Board and the CSR Committee, ensuring that it aligns with the company’s CSR policy and the guidelines in Schedule VII.

Conclusion:

• Eligible as CSR:
  An event like a marathon or an awards ceremony can qualify as CSR expenditure if its primary aim is to promote social welfare (e.g., public health, education, or environmental sustainability).
• Not Eligible as CSR:
  Expenditures that are primarily promotional or used for brand building—such as general advertisements or sponsorship of TV programmes without a direct social objective—do not qualify as CSR expenditure.

By ensuring that the primary objective of the event aligns with the social causes specified under Schedule VII, a company can justify it as CSR expenditure. Otherwise, if the intent is mainly promotional, it should be treated as a marketing expense.

When determining a company’s obligation for Corporate Social Responsibility (CSR) under Section 135(5) of the Companies Act, 2013, the “average net profit” is generally calculated on the basis of net profit before tax.

Key Points:

• Accepted Practice:
  Although the statute does not explicitly state “before tax” or “after tax,” the common interpretation—and the practice followed by most companies—is to use net profit before tax. This approach is supported by guidelines issued by the Ministry of Corporate Affairs.

• Rationale:
  Using net profit before tax provides a more consistent measure of a company’s performance because it is not affected by variations in tax rates or tax planning strategies. This ensures that the CSR obligation is based on the company’s true operating performance.

• Implication for CSR:
  The average net profit calculated over the preceding three financial years (using the before-tax figures) is compared against the prescribed threshold to determine if a company is required to spend on CSR activities.

Conclusion:

For CSR compliance under Section 135(5), companies use net profit before tax as the basis for calculating the average net profit. This is the prevailing interpretation and practice to ensure consistency and transparency in assessing CSR obligations.