Companies (Cost Records and Audit) Rules, 2014 amended….

[Mr. M. GOVINDARAJAN]

Introduction

Ministry of Corporate Affairs brought out a Rule called as ‘Companies (Cost Records and Audit) Rules, 2014 vide Notification No. 425(E), dated  30.06.2014 in superssion of erstwhile Cost Accounting Record Rules.  The said Rule has been modified extensively on the basis of representations received from Institute of Cost Accountants of India and the stakeholders, deliberations and recommendations made by the Expert Committee constituted by the Ministry of Corporate Affairs.   The Ministry of Corporate Affairs brought out an amendment to the original Rule on 31.12.2014.

New definition

Clause 2(i) of Amendment Rule provides for the insertion of new Rule 2(aa) giving definition for ‘Central Excise Tariff Act Heading’ as the heading as referred to in the Additional Notes in the First Schedule to the Central Excise Tariff Act, 1985.

Application of Cost Records

Clause 2(ii) of the Amendment Rule substituted the erstwhile Rule 3.  The erstwhile Rule 3, for the purpose of maintaining Cost Records divided the companies, including foreign companies into four categories as detailed below:

1. Companies engaged in the production of goods in strategic sectors;
2. Companies engaged in an industry regulated by a Sectoral Regulator or a Ministry or Department of Central Government;
3. Companies operating in areas involving public interest;
4. Companies (including foreign companies other than those having only liaison offices) engaged in the production, import and supply or trading of medical devices.

The erstwhile Rule 3 fixed threshold limit for maintaining cost records as detailed below:

  For A group  companies the threshold limit is – the net worth of the company ₹ 500 crores or more; or the turnover – ₹ 500 crores or more;

  For B Group companies, the threshold limit is –

• In the case of a multi-product or a multi services company i.e., a company producing more than one product or service, any product or a service for which the individual turnover is Rw.50 crore or more;
• In the case of a company, producing any one specific product or service, if the net worth of the company is ₹ 150 crores or more or the turnover is ₹ 25 crores or more;

For C Group companies, the threshold limit is-

• In the case of a multi-product or a multi services company, any product or a service for which the individual turnover is ₹ 50 crores or more;
• In the case of a company producing any specific product or service, if the net worth of the company is ₹ 150 crores or more or the turnover is ₹ 25 crores or more.

For D Group companies, the threshold limit is-

• In the case of a company engaged in multiple products, any product or device for which the individual turnover is ₹ 10 crores or more or one third of the turnover whichever is less;
• In the case of a company engaged in one specific product or device, if it has net worth of ₹ 150 crores or more or the turnover is ₹ 25 crores or more.

The newly substituted Rule 3 divides the company into two categories as-

1. Regulated Sectors  - Telecom, Electricity, Petroleum products, Drugs and Pharmaceuticals, fertilizers and sugar and industrial alcohol;
2. Non regulated sectors – 33 industry/sector/product/service are included.

The threshold limit for maintaining cost records for the above said categories is ₹ 35 crores or more during the immediately preceding financial year.

The proviso to Rule 3 provides that nothing in Serial No. 33 of the B – Non regulated sectors  (Production, import and supply or trading of medical devices) shall apply to foreign companies having only liaison offices.

The second proviso to Rule 3 provides that nothing contained in Rule 3 shall apply to a company which is classified as a micro enterprise or a small enterprise including as per the turnover criteria under Section 7(9) of the Micro, Small and Medium Enterprises Development Act, 2006.

Applicability for Cost Audit

Clause 2(iii) of the amended Rule for the substitution of new Rule 4 for the erstwhile Rule 4.  Rule 4 deals with the applicability of cost audit.

The erstwhile Rule 4 provides that in case of a multi product or a multi services company specified in clause B(b) and C(B) of Rule 3, the requirement for cost audit shall apply to a product or a service for which the individual turnover (from such specific product or such specific service) is ₹ 100 crores or more;

In the case of a company producing any one specific product or service specified in Clause B (b) and Clause C(b) of Rule 3, the requirement for cost audit shall apply if the net worth of the company is ₹ 500 crores or more or the turnover from such product or such service is ₹ 100 crores or more.

In the case of D category companies the threshold limit for cost audit is as detailed below:

• Which has multiple products or devices (i.e., a company producing, importing and supplying or trading in more than one medical device or product) the requirement for cost audit shall apply to a medical device or product for which the individual turnover (from such specific medical device or product) is ₹ 10 crore or more, or one third of the turnover, whichever is less;
• Which has only one product or device (i.e., a company producing, importing and supplying or trading one medical service or product), the requirement for cost audit shall apply if the net worth of the company is ₹ 150 crore or the turnover is ₹ 25 crores or more.

The newly substituted Rule 4 provides that –

• Every company specified in item A of Rule 3 shall get its cost records audited if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs.50 crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained is Rs.25 crores or more;
• Every company specified in item B of Rule 3 shall get its cost records audited if the overall annual turnover of the company from all its products and services during the immediately financial year is ₹ 100 crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained is Rs.35 crore or more.

Non applicability of cost audit

The requirement of cost audit under Rule 4 shall not apply to a company which is covered in Rule 3 and-

• Whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue; or
• Which is operating from a special economic zone.

Maintenance of records

Rule 5 deals with maintenance of records.  Rule 5(1) provides that every company under these rules including all units and branches thereof, shall, in respect of each of its financial year commencing on or after 01.04.2014, maintain cost records in Form – CRA 1.

Clause 2(iv) of the amendment Rule inserted a proviso to Rule 5(1).   The newly inserted proviso provides that in case of company covered in Sl. No. 12 and Sr. 24 to 32 of item (B) of Rule 3, the requirement under this rule shall apply in respect of each of its financial year commencing on or after 01.04.2015.

Sl. No. 12 – Coffee and tea;

Sl. No. 24 – Milk power;

Sl. No. 25 – Insecticides;

Sl.No. 26 – Plastics and Polymers;

Sl. No.27 – Tyres and tubes;

Sl. No. 28 – Paper;

Sl. No. 29 – Textiles;

Sl. No. 30 – Glass;

Sl. No. 31 – Other machinery;

Sl. No.32 – Electrical or electronic machinery.

Appointment of Cost Auditor

Rule 6 provides for the appointment of Cost audit, its procedure and the return to be filed before the Registrar of Companies.  Rule 6(3) provides that every cost auditor appointed as such shall continue in such capacity till the expiry of 180 days from the closure of the financial year or till he submits the cost audit report, for the financial year which he has been appointed. 

Clause 2(v) of the amendment Rule inserted sub Rule 6(3A) after Rule 6(3).  The newly inserted Rule 6(3A) provides that any casual vacancy in the office of a cost auditor, whether due to resignation, death or removal, shall be filled by the Board of Directors within 30 days of occurrence of such vacancy and the company shall inform the Central Government in Form CRA – 2 within 30 days of such appointment of Cost Audit.

Omission of Rule 7

Clause 2(vi) of the amendment Rule omitted erstwhile Rule 7 which provides for which companies the rules would not apply. 

Substitution of Forms

 Clause 2(vii) substituted the Forms CRA-1 and CRA -3.

CRA – 1 Form

The CRA-1 form is to be filed before RoC pursuance to Rule 5(1) of the Rules.   The following are the particulars relating to the items of costs to be included in the Books of Accounts:

• Material costs;
• Employee costs;
• Utilities;
• Direct expenses;
• Repairs and maintenance;
• Fixed assets and depreciation;
• Overheads;
• Administrative overheads;
• Transportation cost;
• Royalty and Technical know-how;
• Research and Development Expenses;
• Quality control expenses;
• Pollution control expenses;
• Service department expenses;
• Packing expenses;
• Interest and financing charges;
• Any other item of cost;
• Capacity determination;
• Work-in-progress and finished stock;
• Captive consumption;
• By-products and Joint products;
• Proper records up to the point of separation of products or services;
• Adjustment of cost variances;
• Reconciliation of cost and financial accounts;
• Related party transactions;
• Expenses or incentives on exports;
• Production records;
• Sales records;
• Cost statements;
• Statistical records;
• Records of physical verification.

Form CRA - 3

Form CRA -3 is the form of the cost audit report.  The cost audit report shall be duly signed by the cost auditor.  The cost audit report shall be annexed with the following:

• Part – A
  • General Information;
  • General details of Cost Auditor;
  • Cost Accounting Policy;
  • Product/Service details for the company as a whole;
• Part – B – for manufacturing sector

• Quantitative information;
• Abridged cost statement;
• Details of material consumed;
• Details of utilities consumed;
• Details of industry specific operating expenses;

• Part C – For service Sector
  • Quantitative information;
  • Abridged cost statement;
  • Details of materials consumed;
  • Details of utilities consumed;
  • Details of industry specific operating expenses; 
• Part D
  • Product and service profitability statement;
  • Profit reconciliation;
  • Value addition and distribution of earnings;
  • Financial position and ratio analysis;
  • Related party transactions
  • Reconciliation of indirect taxes

The Annexure shall be signed by the Cost audit, Company Secretary/Director and the Director.                     

Discussions to this article

[Debtosh Dey]

New cost audit rules are welcome !

Cost audit can be very helpful to tax authorities, bankers and others concerned if regulated on scientific terms to examine normal expenditure for a given income, regard being had to capital employed. In the process, wasteful expenditure is identified enabling the enterprise to augment cost competitiveness and profitability. Thus, ultimately cost audit benefits shareholders, consumers and society at large.

Cost accounts and cost audit have special significance with respect to valuation of related party transactions referred to in section 188(1) of the Companies Act, 2013, specially where fair market price is unknown. Central Excise, Service Tax, Customs and many State VAT laws have close resemblance with the concept of “arm’s length pricing” under Income Tax Act (Section 92C) where Cost plus basis for fair price determination, is adopted besides other basis.

India is probably the first country to introduce cost audit on some Govt contracts way back in 1925 and under Companies Act, 1956 initially for a few industries like cement, sugar, textiles, automobiles, etc. With growing importance of cost audit, more and more industries were covered till 2011-12 when cost audit got its widest coverage. By this time, Cost Audit Reports were being increasingly referred to by tax authorities and cited in various suits for protecting revenue. Cost auditor is an invitee to Audit Committee of the company, were such Committee is required to be formed under Companies Act.

Global financial scams prompted progressive countries to revisit financial reporting standards and corporate governance and introduce parallel independent audits besides financial audit. Cost audit is also emerging as an useful parallel audit that presupposes cost accounting which can infuse various scientific tools like technical estimates, quantitative techniques, work study, systems analysis, etc besides accounting. Such infusion is necessary for meaningful integration of non-financial data with accounts for managerial planning and control including performance evaluation. It is worth mentioning that secretarial audit has also been introduced as another parallel audit for certain companies in Companies Act, 2013.

Debtosh Dey, M.Sc (Engg), FIE, C. Engg(I), FCMA, FCS, LL.B.