Rule 7 of CSR Rules provides that the administrative overheads shall not exceed five percent. of total CSR expenditure of the company for the financial year. It implies that any expenditure on administrative overheads in excess of five percent. of total CSR expenditure for the financial year will not be allowed as CSR expenditure. Considering the importance of administrative overheads, the following two important questions need to be considered for arriving at the administrative overheads and the impact these will have on CSR limits or calculation, are:

EXPENSES TO BE COVERED UNDER ‘ADMINISTRATIVE OVERHEADS’

In order to understand ‘administrative overheads’, first of all, it is important to understand as to what are overheads. In general terms, Overheads comprise costs of indirect materials, indirect employees and indirect expenses.

Before the recent amendments in the CSR Rules, 2014 on 22nd January, 2021, the term ‘Administrative Overheads’ was not defined and the companies usually included in the overheads, the general and other administration expenses incurred in managing the CSR project such as salary to personnel involved in CSR activities whether whole time or otherwise, conveyance, travelling or other expenses incurred in carrying out the CSR project.

As per the amendments made in the CSR Rules, the term ‘Administrative Overheads’ has been defined in the Rules as under:

“Administrative overheads” means the expenses incurred by the company for ‘general management and administration’ of Corporate Social Responsibility functions in the company but shall not include the expenses directly incurred for the designing, implementation, monitoring, and evaluation of a particular Corporate Social Responsibility project or programme.

While the definition of administrative overheads has brought some clarity as how to determine the overheads yet the term continues to be ambiguous with different interpretations being given to it and it is still not clear as to what to include and what not to include in the administrative overheads.

In order to determine what should form part of the administrative overheads, we need to look at some definitions of the term to reach to logical determination of overheads for the purposes of CSR.

Firstly, one can find identical provisions under the Foreign Contribution (Regulation) Act, 2010 (‘FCRA’), a law whose provisions share a common objective as that of CSR i.e. serving the society at large preferably unserved, affected and underprivileged people of society. Similar to CSR Rules, FCRA allows the recipient (person receiving donation) to spend the funds towards administrative expenses but subject to the maximum limit of 20%. Further, the Central Government has outlined a list of following expenses that constitute administrative expenses, for the purpose of FCRA:

i. Salaries, wages, travel expenses or any remuneration realized by the Members of the Executive Committee or Governing Council of the person;

ii. All expenses towards hiring of personnel for management of the activities of the person and salaries, wages or any kind of remuneration paid, including cost of travel, to such personnel.

iii. All expenses related to consumables like electricity and water charges, telephone charges, postal charges, repairs to premise(s) from where the organization or Association is functioning, stationery and printing charges, transport and travel charges by the Members of the Executive Committee or Governing Council and expenditure on office equipment.

iv. Cost of accounting for and administering funds

v. Expenses towards running and maintenance of vehicles

vi. Cost of writing and filing reports.

vii. Legal and professional charges; and

viii. Rent of premises, repairs to premises and expenses on other utilities;

Considering the nature of the above expenses, it can be said that the ‘Administrative Expenses’ means all expenses which assist in carrying out the project and its implementation but which are not directly incurred on the project.

Secondly, the Cost Accounting Standard on ‘Administrative Overheads’ issued by the Institute of Cost and Management Accountants of India considers employees cost, utilities, office supplies, material costs, repair and maintenance cost in determining Administrative Overheads. This said formulae of determining the Administrative Overheads is in consonance with the provisions of the FCRA Rules and considers only indirect expenses which are not directly attributable or identifiable to a Project.

Thus, taking a clue from the foregoing provisions of the FCRA and Cost Accounting Standard, the administrative overheads under the CSR Rules may be interpreted to include all the indirect expenses incurred on the CSR Project. Further, this interpretation also stands good when we read the second and exclusion part of the definition of ‘Administrative Overheads’ as defined under CSR Rules using the words ‘expenses directly incurred’ which means direct expenses do not fall under Administrative Overheads whereas all indirect expenses form part of the Administrative Overheads.

It can be concluded that all expenses incurred indirectly in relation to CSR projects or programmes of a company and which are not directly attributable to the same but are critical to carry out the Project may be considered as ‘Administrative Overheads’ for the purpose calculation of 5% limit of allowable expenditure.

For example, (i) a company has identified one project on providing education to poor children or slum children wherein some of its employees are involved in hiring the teachers, taking premises on rent, arranging books, stationery, uniform, etc. In this case, expenses incurred towards teachers’ salary, rent of the premises and other stationary items shall form part of the CSR Project, but the cost of employee of the Company attributable to that Project shall form part of the Administrative Overheads.

(ii) company is implementing a relief project, its employees are directly distributing food, medicines, clothes to affected population, in such case, proportionate cost of salary paid will be treated as part of CSR expenditure and not as administrative overhead.

WHETHER ADMINISTRATIVE OVERHEADS OF IMPLEMENTING AGENCY TO BE CONSIDERED IN OVERALL LIMIT OF 5% OR NOT

The definition of the term ‘administrative expenses’ very clearly defines such expenses to mean expenses incurred by the company for ‘general management and administration’ of Corporate Social Responsibility functions in the company. So, one point is very clear that administrative expenses have to be seen from the point of company as the same relates to CSR functions of a company and not the implementing agency. Further while executing CSR projects or activities, the implementing agency may or may not charge any fees for designing or implementing the same, the CSR Rules clearly provide that any expenses in connection with designing, implementing, evaluating any CSR project or activity shall not be deemed to be part of administrative expenses and therefore any such fees, if charged by implementing agency, shall not be deemed to be part of the administrative expenses.

Besides, another question, which arises is that if designing, implementing, evaluating etc., any CSR project or activity will not be considered as part of administrative expenses, so how it will be treated? The purpose of excluding such expenses from the purview of administrative expenses is that they are directly connected with the CSR project or activity. Further any company incurring such expenditure will definitely, not be paying the same out of its pocket over and over and above the CSR expenditure. Since these expenses are directly related to CSR projects or activities, such expenses shall form part of the total CSR expenditure. But in such a case, there is need for monitoring such expenditure and the responsibility of monitoring such expenses lies on the shoulders of the Board of directors of a company. The Board of directors who are responsible for approving the CSR projects or activities, have to ensure that a reasonable cost (if any) is incurred on expenditures related to designing, implementing, evaluation of CSR projects or activities approved by them.