Relaxation in CSR Rules pertaining to R & D activities

In yet another effort to help combat COVID-19, Ministry of Corporate Affairs (MCA) vide Notification dated 24^th August 2020 [G.S.R. 526(E)] has relaxed Companies (CSR Policy) Rules to provide impetus to pharmaceutical, medical device, vaccine and other such companies for the next three fiscal years. The amendment will allow such companies to use their CSR funds for Research & Development activities, albeit with certain conditions and compliance.

Normal course of business

Under Rule 4(1) of Companies (Corporate Social Responsibility Policy) Rules, 2014, every company required to carry out CSR activities is required to carry out CSR Activities as per its stated CSR Policy, as projects or programs or activities but excluding activities undertaken in pursuance of its normal course of business.

Pharmaceutical, medical device, vaccine and other such companies carry out Research & Development in the normal course of their business and as such these companies were precluded from spending their CSR funds for their own R & D. The recent amendment has now omitted the words “excluding activities undertaken in pursuance of its normal course of business” under Rule 4(1).

R & D conditionally covered under CSR

Any company engaged in research and development activity (even in the normal course of business) may now undertake research and development activity for a new vaccine, medicine or medical devices related to COVID-19 and such expenditure would be considered as ‘CSR expenditure’ for financial years 2020 – 21, 2021 – 22 and 2022 – 23, subject to the conditions that:

(i) such research and development activities shall be carried out in collaboration with any of the institutes or organisations mentioned in item (ix) of Schedule VII to the Act and

(ii) details of such activity shall be disclosed separately in the Annual Report on CSR included in the Board’s Report.

Analysis

1. This relaxation is only for companies engaged in research and development activity of a new vaccine, drugs or medical devices and for financial years 2020 – 21, 2021 – 22 and 2022 – 23.
2. Expenditure on Research and development activities carried out by companies engaged in research and development activity of a new vaccine, drugs or medical devices shall be allowed as expenditure on CSR.
3. However, such research and development activities should be carried out in collaboration with any of the institutes or organisations mentioned in item (ix) of Schedule VII to the Act i.e., incubators funded by Central Government or State Government or any agency or Public Sector Undertaking of Central Government or State Government, or public funded Universities, Indian Institute of Technology (IITs), National Laboratories and Autonomous Bodies (established under the auspices of Indian Council of Agricultural Research (ICAR), Indian Council of Medical Research (ICMR), Council of Scientific and Industrial Research (CSIR), Department of Atomic Energy (DAE), Defense Research and Development Organization (DRDO), Department of Science and Technology (DST), Ministry of Electronics and Information Technology) engaged in conducting research in science, technology, engineering and medicine.
4. Details of such R & D activity must be disclosed by the company separately in the Annual Report on CSR included in the Board’s Report.
5. MCA will probably provide a format or template for reporting such research and development activity for a new vaccine, drugs or medical devices.
6. Since ‘CSR Expenditure’ is not allowed as ‘Business Expenditure’ under section 37 of Income Tax Act, 1961, expenditure on research and development activity for a new vaccine, medicine or medical devices related to COVID-19 will not be tax deductible unless the Ministry of Finance also amends section 37 of the Income Tax Act, 1961

Ministry of Corporate Affairs’ (MCA) Notification dated 24^th August 2020 [G.S.R. 526(E)] can be read or downloaded at: http://www.mca.gov.in/Ministry/pdf/csr_26082020.pdf