pate MCA expands the scope of cost audit with the amendment of the Companies (Cost Records and Audit) Rules, 2014

Transcription

1 pate MCA expands the scope of cost audit with the amendment of the Companies (Cost ACS Swati Rampuria Vinod Kothari & Company January 2, 2015 Check at: for more write ups. Copyright: This write up is the property of Vinod Kothari & Company and no part of it can be copied, reproduced or distributed in any manner. Disclaimer: This write up is intended to initiate academic debate on a pertinent question. It is not intended to be a professional advice and should not be relied upon for real life facts.

2 (Cost The Ministry of Corporate Affairs ( MCA ) amended the Companies (Cost ( ) 1 on December 31, 2014 by the Companies (Cost Amendment ( Amendment ) 2 to bring manifold changes to the existing scope of maintaining cost records and conducting cost audit. The issue of was itself delayed considering that the same was issued on June 30, 2014 i.e. at a time when listed companies would have already convened their first board meeting of the financial year. In the absence of any clarity regarding the validity of Companies (Cost Accounting Records) s, 2011 and Companies (Cost Audit Report) s, 2011 under Companies Act, 1956 since section 209 was repealed by section 148 of Act, 2013, companies appointed cost auditor as per the s, Then came the which actually reduced the scope of cost audit by deleting certain sectors in comparison to Companies (Cost Audit Report) s, Now, with the Amendment, 2014, MCA has done a volte face by increasing the scope and linking the applicability of the to CETA headings. Highlights of Companies (Cost Amendment 2 Definition -- Central Excise Tariff Act Heading-defined Central Excise Tariff Act Heading means the heading as referred to in the Additional Notes in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) New insertion as rule 2 (aa). This has been done since, the requirement of maintaining cost records and appointing a cost auditor has been linked to CETA headings, similar to Companies (Cost Audit Report) s, 2011 which were missing in the s, Application of cost records Only certain classes of companies based on the The list of products and services have been Unlike which prescribed for different 1 Read the entire text at : 2 Read the entire text at :

3 (Cost production of certain products or rendering of certain services were required to maintain cost records and appoint a cost auditor based on the specified threshold of turnover or networth. widened and the lone basis of determining applicability of Amendment is turnover. Thus, companies including foreign companies defined in sub-section (42) of section 2 of the CA, 2013 which are engaged in the production of goods or providing services in the specified sectors, having an overall turnover from all its products and services of rupees thirty five (35) crores or more during the immediately preceding financial year, will have to include cost records for such products or services in their books of account. threshold limits of turnover or networth for products and services, the Amendment, has prescribed a blanket threshold for all product and services covered by rules 3. The sectors have further been categorized as Regulated and Non- Regulated Sectors. Some new sectors like paper, textiles, glass, tyres and tubes have been included. These sectors were covered by Companies (Cost Audit Report) s, The anomaly that can be drawn here is that cost records to be prepared hinges on the annual turnover. Here the amended s imply that the annual turnover needs to be computed for all the products and services the company is engaged into (and not just the specified products and services). This gives the impression that cost audit records for the specified product / service is to be

4 (Cost maintained, irrespective of whether the turnover from that specified product / service exceeds Rs. 35 crores or not. In most of the cases it is quite obvious that the aggregate turnover from all the products or services would exceed Rs. 35 crores, thereby leading to maintenance of cost records, thus increasing the compliance burden of companies. Let us take an example here: A Company is into manufacturing of product A, B, C and providing of service D. Out of which product B falls under the specified category and the turnover from B is Rs. 3 crore. But the overall turnover from all the products and services (A, B, C and D) exceeds Rs. 35 crore. As the company s turnover hits the threshold prescribed, the requirement for maintenance of cost records crops in for the product B.

5 (Cost Further, foreign companies operating through liaison office and engaged in production, import and supply or trading of heart valves, bone cements etc. {as provided in rule 3 (D)} have been completely exempted from the applicability of rule 3. Also, rule 3 will not be applicable to a company which is classified as a micro or small enterprise as per the turnover criteria under sub-section 9 of section 7 of the Micro, Small and Medium Enterprises Development Act, Applicability for cost audit Every company specified in sub - clause (b) of clause (A) of rule 3 shall get its cost records audited, if the net worth OR turnover of the company is rupees five hundred (500) crores or more. For the sectors specified in sub- clause (b) of clause (B) and subclause (b) of clause (C) of, the thresholds Every company specified in clause (A) and (B) of rule 3 shall get its cost records audited, if: i. For Regulated Sectors (clause 3 A) - the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees fifty (50) crores or more AND the In the amended clause, networth as a basis for determining the applicability of cost audit has been done away with. Further, both the conditions will have to be fulfilled. This is not to say that every company which has to maintain cost records will also have to appoint a cost auditor. Suppose, a company s aggregate turnover is

6 (Cost limit shall be as under : (i) in the case of a multiproduct 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 (from such specific product or such specific service) is rupees one hundred (100) crores or more; (ii) in the case of a company, producing any one specific product or service, if the net worth of the company is rupees five hundred (500) crores or more OR the turnover is rupees one hundred (100) crores or more. aggregate turnover of the individual product or products or service or services is rupees twenty five (25) crores or more. ii. For unregulated sectors (clause 3 B) - the overall annual turnover of the company from all its products and services during the immediately preceding financial year is rupees hundred (100) crores or more AND the aggregate turnover of the individual product or products or service or services is rupees thirty five (35) crores or more. rupees fifty (50) crores however, its turnover from individual product/ service (covered by rule 3) is rupees ten (10) crores. Such a company has to maintain cost records. It however, does not have to appoint a cost auditor. For the sectors specified in sub- clause (b) of clause (D) of rule 3, the thresholds limit shall be as under : (i) in the case of a multiproducts or devices company any product or a device for which the individual turnover is rupees ten (10) crores or more OR one third of

7 (Cost the turnover whichever is less; (ii) in the case of one product or device, if the net worth of the company is rupees one hundred and fifty crores (150) crores or more OR the turnover is rupees twenty five (25) crores or more. 4(3) 7 had similar requirements The requirement for cost audit under these rules shall not apply to a company which is covered in rule 3, andi. Whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue; or ii. Which is operating from a special economic zone. Exemption is provided to these two class of companies. 5(I) Maintenance of Records -- Sectors covered by serial no. 12 (coffee and tea) and serial number 24 to 32 of item B of 3 as amended (such as textiles, paper), the requirement under this rule shall apply in respect of each of its financial year commencing on or This proviso has been inserted in rule 5 sub rule (1), providing a breathing space to the companies engaged in the sectors which have been incorporated by way of this amendment. These companies are required to maintain cost records

8 MCA expands the scope of cost audit with the amendment of the Companies (Cost 6(3A) -- 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 thirty (30) days of such appointment of cost auditor. after April 1, from April 1, 2015 onwards. Newly inserted s 7: s not to apply in certain cases- The requirement for cost audit under these rules shall not be applicable to a company which is covered under rule 3, and: (i) whose revenue from exports, in foreign exchange, exceeds seventy five per cent of its total revenue; or (ii) which is operating from a special economic zone. -- This rule has been omitted and made part of 4 i.e. Applicability for Cost Audit. Annex ures Annexures for form CRA-1 and CRA-3 have been

9 (Cost amended to align it with the amendments prescribed above. In form CRA-1, pursuant to s, 2014 there were 28 particulars relating to the items of cost to be included in the books of accounts, which by Amendment, 2014 has been increased to 30. Notably, the cost auditor will continue to report on related party transactions irrespective of whether cost audit is applicable or not. Herein, the definition of normal selling price has been provided which is on similar lines as arm s length basis. Further, the basis of calculation of normal selling price has also been specified which is similar to the methods of calculation of transfer pricing as under Income Tax Act, The crux is that with the new amendment now the related party transactions will come under the purview of four auditors i.e. statutory auditor, secretarial auditor, cost auditor and tax auditor.

10 (Cost Conclusion Cost audit has not lost its relevance. which actually reduced the scope of cost audit by deleting certain sectors has now been amended to include various sectors and expand the ambit of cost auditing. With the Amendment the ambiguity of identification of different sectors has been removed by identifying these sectors with the corresponding CETA code and the determination of requirement to maintain cost records has been simplified as there is only one threshold criteria specified. The Amendment also provides the scope for inclusion and exclusion of companies from the ambit of cost audit. Companies which have to maintain cost records does not necessarily need to carry out cost audit. The Amendment are intended to specify the class of companies that have to maintain cost records and have an audit of such records carried out. The wait is now for the publication of the Amendment in the Gazette of India. Also see our related write-ups at: Read the latest articles on Companies Act, 2013 at: