DRAFT RULES – COMPANIES (COST RECORDS AND COST AUDIT) RULES, 2013

[Mr. M. GOVINDARAJAN]

Powers of Central Government

Section 148 of the Companies Act, 2013 (‘Act’ for short) gives powers to Central Government to specify audit of items of cost in respect of certain companies. Section 148 (1) of the Act provides that Notwithstanding anything contained in this Chapter, the Central Government may, by order, in respect of such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilization of material or labor or to other items of cost as may be prescribed shall also be included in the books of account kept by that class of companies. The Central Government shall, before issuing such order in respect of any class of companies regulated under a special Act, consult the regulatory body constituted or established under such special Act.

Section 148(2) provides that If the Central Government is of the opinion, that it is necessary to do so, it may, by order, direct that the audit of cost records of class of companies, which are covered under sub-section (1) and which have a net worth of such amount as may be prescribed or a turnover of such amount as may be prescribed, shall be conducted in the manner specified in the order.

Section 469 of the Act gives powers to Central Government to make rules. Section 469(1) provides that the Central Government may, by notification, make rules for carrying out the provisions of this Act. Section 469 (2) of the Act provides that without prejudice to the generality of the provisions of sub-section (1), the Central Government may make rules for all or any of the matters which by this Act are required to be, or may be, prescribed or in respect of which provision is to be or may be made by rules.

Draft Rules

By virtue of the powers given under Section 469(1) and 469(2) of the Act the Central Government made draft rules viz., ‘Companies (Cost Records and Cost Audit) Rules, 2013 (‘Rules’ for short) and put the same in the web site for the comments of the stakeholders and the public.   The comments and suggestions on the said matter are to be reached to the Ministry by 6^th December 2013.

Applicability of Rules

These rules are applicable to three types of companies engaged in the production of goods or services-

• Companies engaged in strategic sectors;
• Companies engaged in an industry regulated by a Sectoral Regulator or a Ministry of Department of Central Government;
• Other companies.

Companies engaged in strategic sectors

The following are the companies covered under the first category ‘companies engaged in strategic sectors’-

• Machinery, mechanical appliances used in defence, space and atomic energy sectors such as-
  • Nuclear reactors, fuel elements (cartridges), non-irradiated, for nuclear reactors, machinery and apparatus for isotopic separation;
  • Steam or other vapor generating boilers (other than central heating hot water boilers capable also of producing low pressure steam), super-heated water boilers;
  • Air craft, spacecrafts and parts thereof;
  • Ships, boats and floating structures.
• Turbo jets and turbo propellers;
• Arms and ammunition;
• Propellant powders, prepared explosives (other than propellant powders), safety fuses, detonating fuses, percussion or detonating caps, igniter, electric detonators;
• Radar apparatus, radio navigational and apparatus and radio remote control apparatus;
• Tanks and other armored fighting vehicles, motorized, whether or not filled with weapons and parts of such vehicles, that are funded (investment made in the company) to the extent of 90% or more by the government or Government Agencies.

Companies engaged in an industry regulated by a Sectoral Regulator or a Ministry of Department of Central Government

The following are the companies covered under the second category ‘companies engaged in an industry regulated by a Sectoral Regulator or a Ministry of Department of Central Government’:

• Port services of stevedoring, pilotage, hauling, mooring, re-mooring, hooking, measuring, loading and unloading services rendered by a Port in relation to a vessel or goods regulated by the Tariff Authority for Major Ports under Section 111 of the Major Port Trusts Act, 1963;
• Aeronautical services of air traffic management, aircraft operations, ground safety services, ground handling, cargo facilities and supplying fuel et., rendered by airports and regulated by Airports Economic Regulatory Authority under the Airports Economic Regulatory Authority of India Act, 2008;
• Telecommunication services made available to users by means of any transmission or reception of signs, signals, writing and sounds or intelligence of any nature (other than broadcasting services) and regulated by the Telecom Regulatory Authority of India under the Telecom Regulatory Authority of India Act, 1997;
• Generation, transmission, distribution and supply of electricity regulated by the Central Electricity Regulatory Commissioner under the Electricity Act, 2003, other than for captive generation;
• Roads and other infrastructure projects that are recipients of concessions;
• Active pharmaceutical ingredients or bulk drugs & formulators included in Chapter 30 of the Central Excise Tariff Act;
• Fertilizers under administrated price mechanism (urea) or subsidized, included in Chapter 31 of the Central Excise Tariff Act;
• Sugar and industrial alcohol included in Chapter 17 and 22 of Central Excise Tariff Act;
• Petroleum products under administered price mechanism (diesel, PDS Kerosene, Domestic LPG and Cooking Gas) or subsidized.

Other companies

The following are covered under the third category ‘other companies’:

• Railway or Tramway locomotives, rolling stock, railway or tramway fixtures and fittings, mechanical (including electro mechanical) traffic signaling equipments of all kind as included in Chapter 86 of Central Excise Tariff Act;
• Mineral products included in Chapter 25 of the Central Excise Tariff Act;
• Ores included in Chapter 26 of the Central Excise Tariff Act;
• Mineral Fuels, mineral oils etc., included in Chapter 27 of the Central Excise Tariff Act (such as coal, lignite, peat, coke, coal gas etc.,);
• Base metals included in Chapters 72, 73, 74, 75, 76, 78, 79, 80 and 81 of the Central Excise Tariff Act;
• Inorganic chemicals, organic or inorganic compounds of precious metals, of rare-earth metals, of radioactive elements or of isotopes included in Chapter 28 of the Central Excise Tariff Act, Organic Chemicals included in Chapter 29 of the Central Excise Tariff Act;
• Aircraft, spacecraft, that are funded (investment made in the company) to the extent of 90% or more by Government or Government Agencies;
• Vehicles, aircraft, vessels and associated transport equipment, that are funded (investment made in the company) to the extent of 90% or more by the Government or Government Agencies;
• Jute and jute products;
• Edible Oil under Administrative Price Mechanism;
• Construction industry where there is any government concession or grant in any form;
• Provision of healthcare services included check-up and preventive services, diagnostic services, disease management and patient care services including corporate hospitals;
• Provision of education services, other than similar services falling under philanthropy or as part of social spend and do not form part of any business.

Monetary limit for applicability

In case of a multi product or a multi services company (i.e., a company producing more than one product or service) the requirement shall apply to a product or a service for which the individual turnover from such specific product or such specific service is Rs.100 crores or more. In case of a company producing any one specific product or service covered the requirement shall be if the net worth of the company is Rs.500 crores or more or the turnover from such product or such service is Rs.100 crores or more whichever is less.   In the case of a company engaged in a strategic industry the requirement shall be applicable if the turnover of the country is Rs.500 crores or more. In case of companies engaged in an industry regulated by a sectoral regulator, the requirements of sectoral regulator regarding cost records and cost audit shall be taken into account.

Cost Audit

The companies required to include cost records in their books of account shall be required to get such records audited by a cost auditor, an auditor appointed to conduct audit of cost records under Section 148(3) of the Act, according to which a Cost Accountant in practice appointed by the Board on such remuneration as may be determined by the members in such manner as may be prescribed.

Rule 2(b) defines the terms ‘Cost Accountant in practice’ as a cost accountant as defined in Section 2(1)(b) of the Cost and Works Accountants Act, 1959 and who holds a valid certificate of practice under Section 6(1) of the Act and who is deemed to be in practice under Section 2(2) of that Act and includes a firm of cost accountants.

Every company covered under these rules shall appoint a cost audit at a remuneration to be determined in accordance with the provisions of Section 148(3) and rules made there under within 180 days of the commencement of every financial year. Every such cost auditor shall submit the cost audit report along with his or its reservations and qualifications or observations or suggestions in Form II (not yet notified). He shall forward the report to the Board within 180 days from the close of a company’s financial year to which the report relates.

The provisions of Section 143(12) of the Act and the relevant rules shall apply mutatis mutandis to a cost auditor during performance his functions.

Maintenance of records

Every company to which these rules apply, including all units and branches thereof shall, in respect of each of its financial year keep cost records in Form ‘T’, on regular basis in such manner so as to make it possible to calculate per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly or quarterly or half yearly or annual basis.

The cost records shall be maintained in such manner so as to enable the company to exercise as far as possible, control over the various operations and costs with a view to achieve optimum economies in utilization of resources.   These records shall also provide necessary data which is required to be furnished under these rules.

Non applicability

These rules shall not apply to companies in which are having more than75% of their revenue in the form of earnings in foreign exchange or if such units are operating out of special economic zones.

Repealed Rules

These Rules repealed the following rules:

• Companies (Cost Accounting Records) Rules, 2011;
• Companies (Cost Audit Report) Rules, 2011;
• Cost accounting Records (Telecommunication Industry) Rules, 2011;
• Cost Accounting Records (Petroleum Industry) Rules, 2011;
• Cost Accounting Records (Electricity Industry) Rules, 2011;
• Cost Accounting Records (Sugar Industry) Rules, 2011;
• Cost Accounting Records (Fertilizer Industry) Rules, 2011;
• Cost Accounting Records (Pharmaceutical Industry) Rules, 2011.

Analysis

The Notification dated 03.06.2011 issued by the MCA superseded the then existing 27 Cost Accounting Records Rules and in place the 7 Record rules were made which are now repealed besides the Companies (Cost Audit Report) Rules, 2011.

The new draft rule merged all the eight rules together but with some omissions. The Institute of Cost Accountants of India and its members express concern over this draft rules. The President of ICAI indicated that many of the key sectors which drive the Indian economy having major contribution ought to have been covered under the purview of the provisions, whereas the whole thrust is on certain Strategic & Regulated Industries and Industries/Sectors which are mostly enjoying Government concession/grant/subsidy. The Council is very much concerned and will leave no stone unturned to impress upon the Government, to protect the interest of economy, stakeholders and the profession.

The erstwhile Companies (Cost Accounting Records) Rules, 2011 is applicable to every company, including a foreign company as defined under section 591 of the Act, which is engaged in the production, processing, manufacturing, or mining activities and wherein, the aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or wherein the aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees; or wherein the company’s equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.   These rules are not applicable to a company which is a body corporate governed by any special Act. These rules shall not apply to the activities or products in respect of bulk drugs, fertilizers, sugars, telecommunication, electricity, industrial alcohol and petroleum industry.   The present draft rules, as rightly pointed out restricted the areas.  The draft rule shall maintain status quo.

Another missing aspect is the procedure of filing ‘compliance report’ which has been introduced for the better corporate governance with effect from 01.04.2011. Compliance report means compliance report duly authenticated and signed by a cost accountant in the prescribed form of compliance report. Rule 5 of the erstwhile Companies (Cost Accounting Records) Rules, 2011 provides that every company to which these rules apply shall submit a compliance report, in respect of each of its financial year commencing on or after the 1st day of April, 2011, duly certified by a cost accountant, along with the Annexure to the Central Government, in the prescribed form. Rule 6 provides that every company shall submit the compliance report referred to in rule 5 to the Central Government within one hundred and eighty days from the close of the company’s financial year to which the compliance report relates. Rule 7 provides that compliance report, as certified by the cost accountant, shall be approved by the Board of Directors before submitting the same to the Central Government by the company. Rule 8 provides punishment for cost accountant and companies for contravention of these rules. If default is made by the cost accountant in complying with the provisions of these rules, he shall be punishable with fine, which may extend to five thousand rupees. If a company contravenes any provisions of these rules, the company and every officer thereof who is in default, including the persons referred to in sub-section (6) of section 209 of the Act, shall be punishable as provided under sub-section (2) of section 642 read with sub-sections (5) and (7) of section 209 of Companies Act, 1956 (1 of 1956).

To cope up with the better Governance, which is the main thrust of the Government of India, the procedure of ‘compliance report’ is to be restored in the Rules to be finalized by the Government.