Clarifications on Cost Accounting Records and Cost Audit

MCA vide its General Circular 67/2011 and 68/2011 dated 30th November,2011, has issued following clarifications w.r.t cost accounting records and coverage of cost audit, and regarding its applicability and compliance requirements, for the better understanding of companies and professionals

It clearly specifies all the companies, which are not covered under the Companies (Cost Accounting Records), Rules, 2011. This will mean that such companies are not required to maintain cost records and other related formalities contained in the rules.

The companies are as follows:

1. Wholesale or retail trading activities,
2. Banking, financial, leasing, investment, insurance, education, healthcare, tourism, travel, hospitality, recreation, transport services, business/professional consultancy, IT & IT enabled services, research & development, postal/courier services, etc. unless any of these have been specifically covered under any other Cost Accounting Records Rules.
3. Companies engaged in rendering job work operations or contracting/ sub-contracting activities, and are paid only the job work or conversion charges, such as tailoring, baking, repairing, painting, printing, constructing, servicing, etc.
4. Companies engaged In the production, processing, manufacturing or mining activities till such time they commence their commercial operations.
5. Ancillary products/activities of companies incidental to their main operations (i.e. products/activities that do not constitute their main line of business) and wherein the total turnover from the sale of each such ancillary products/activities do not exceed 2% of the total turnover of the company or Rs.20 crores, whichever Is lower. However, required details of all such ancillary products/activities may be maintained under a miscellaneous group and disclosed appropriately.

Besides this, it also details the companies, which are not required to comply with two Cost Audit Order dated 2nd May 2011 and 30th June 2011, which necessitates the companies mentioned therein in the respective orders, to get its cost accounting records audited by a cost auditor. The companies are as follows:

1. Generation of electricity for captive consumption. For this purpose, the term “Captive Generating Plant” shall have the same meaning as assigned in Rule 3 of the Electricity Rules, 2005.
2. Own manufactured products that are consumed exclusively by the company for the sole purpose of production, processing, manufacturing, or mining of its other products or activities that are subject to cost audit.
3. Hundred percent Export Oriented Units.

Further it clarifies that only such items falling under the relevant chapter(s) of the Central Excise Tariff Act, 1985, which constitute intermediate or final or allied products of the industry mentioned in the Cost Audit Order dated 30th June 2011 shall be covered under cost audit and all other items not related to the Industry shall be outside the purview of said orders.

To clarify further, the words “Intermediate products” has been defined to mean only such products that have already undergone partial manufacturing/ production process and are used as inputs for the production, processing, manufacturing or mining of the final products of the industries listed in the said order; and the words “articles or allied products thereof” refer to such articles or allied products that are produced either wholly or predominantly [not less than 50% by weight or volume] by using the listed products as their primary inputs.

To explain this aspect further, the following clarifications are given as illustrations:

(i) For Paints & Varnish Industry, all other items such as tanning or dyeing extracts, tanning & their derivatives, dyes, pigments & other colouring matters, putty & other mastics, printing inks, etc, mentioned in Chapter 32 of the Central Excise Tariff Act, 1985 are not covered unless such items are used as intermediates for the production of Paints & Varnishes or are produced as their allied products.

(ii) For Tyres & Tubes industry, all other items such as natural or synthetic or reclaimed rubber, compounded rubber, hard rubber, rubber thread or cord, conveyer or transmission belts, articles of rubber, etc. mentioned In Chapter 40 of the Central Excise Tarlff Act, 1985 are not covered unless such Items are used as intermediates for the production of Tyres &Tubes or are produced as their allied products.

(iii) Examples of intermediate products include clinker for cement, pulp for paper, sponge iron & pig iron for steel, etc. Examples of articles or allied products of cement include cement bricks, sleepers, pipes; of paper include cartons, boxes, bags, registers; and of steel include ingots, blooms, billets, slabs, beams, angles, tees, channels, pilings, ralls, bars, wire, nails, plates, pipes, tubes, coils, sheets, etc.

Companies are further welcomed to refer their cases for clarification, in view of any doubt, to MCA by giving complete details.

Further clarifications w.r.t applicability and compliance requirements under cost accounting records and cost audit are as follows:

1. Companies covered under Companies (Cost Accounting Records) Rules, 2011 shall only file a simple compliance report as per the notified Form-B (copy is enclosed in the circular) and no other details of cost records are required to be filed with the Government. If all the products/activities of a company, excluding the exempted categories, are covered under cost audit, then the company will not be required to separately file the compliance report.
2. Companies falling under the purview of the Companies (Cost Accounting Records) Rules, 2011 and the Companies (Cost Audit Report) Rules, 2011 for the first time, are mandatorily required to keep cost records and cost details, statements, schedules, etc. in good order for the next eight financial years beginning with first year of application of the said Rules.
3. The term “Turnover” defined in the Companies (Cost Accounting Records) Rules, 2011 shall exclude taxes & duties. It shall have the same meaning, wherever it appears, in all other orders/rules issued in connection with the cost accounting records and cost audit.
4. Following procedure may be followed, for filing the cost audit reports under the Companies (Cost Audit Report) Rules, 2011:
   

   (i) If only one product of a company is subject to cost audit and the company appoints more than one cost auditor, only a consolidated cost audit report [containing inter alia the qualifications, reservations or suggestions, if any, given by all the cost auditors] should be prepared as per the Companies (Cost Audit Report) Rules, 2011 and signed by all the cost auditors.
   For this purpose, company may designate/appoint any one of them as the principal/lead cost auditors who would be responsible for the consolidation and filing the same with the Central Government.

   (ii) If more than one products of a company are under cost audit for which it has appointed either same or separate cost auditors, then they may either submit separate cost audit report for each product group or submit only one consolidated report containing details of each product group under audit separately as per the procedure provided above.

5. Another clarification is regarding the “arms length relationship” between the company and the cost auditor. In order to ensure the independence of the cost auditor, the cost auditor(s) [whether for one or all of the companys products covered under cost audit], shall not provide any other services to the company relating to
   
   

   (i) design and implementation of cost accounting system; or

   (ii) the maintenance of cost accounting records, or

   (iii) act as internal auditor, whether acting individually, or through the same firm or through other group firms where he or any partner has any common interest. It is however clarified that the cost auditors are allowed to certify the compliance report or provide any other services as may be assigned by the company, but which shall not include any of the services mentioned above.