This article is written by Satyanshu Kumari. This article elaborates on Section 148 of the Companies Act, 2013, which states about cost accounting and audit requirements of certain companies. The section is read along with the Companies (Cost Record and Audit) Rules, 2014. The cost records help the companies keep detailed records of the utilisation of labourers, materials, etc. in the companies engaged in production, manufacturing, or processing activities. 

It has been published by Rachit Garg.

Introduction

India became the first country in South Asia to make cost audits mandatory for certain business sectors. When India gained independence and the development of industrialisation took place, a lot of effort was put into facilitating the industrialists to promote manufacturing, but the only problem was the monopolistic practice and other ulterior reasons. In a situation where the price of the manufactured goods or products was found to be excessive, the manufacturer would justify such pricing by relying on the higher cost of inputs. While procuring raw materials or any other goods, there would be under-invoicing of the imports to evade customs duties or over-invoicing of the exports to avail of the export benefits. It was during that time, when India was building its industrial base, that price control or checks on imports and exports were imperative for certain industries from the point of view of public benefit.

Under Section 209(1)(d) of the Companies Act, 1956, the provision related to maintaining the cost accounting records was introduced. For certain classes of businesses, it was mandatory to maintain cost accounting records, get them audited by a cost auditor, and follow the regulatory provisions provided by the Act. With the passage of time and development in technology, there was a dire need for the amendment to the current Companies Act of 1956, which is related to the maintenance of the cost accounting records, which further led to the amendment in 2013, and the provisions relating to the cost accounting records were put under Section 148 of the Companies Act, 2013. 

The provision relating to the auditors has been discussed in various reports at length, such as the JJ Irani Committee’s Report and the report presented by the Standing Committee on Finance on the Companies Bill, 2009. Based on these reports, some major changes relating to audits and auditors were introduced in the Companies Act of 2013.

Companies that have been engaged in multiple activities like production, processing, manufacturing, or mining must maintain records of all the particulars related to the utilisation of material, labour, and other cost items as prescribed by the Central Government. These records include books of account that detail the utilisation of the labourers, material things, and other things. 

The Companies (Cost Records and Audit) Rules, 2014, read with Section 148 of the Act, apply to all the companies registered under the Companies Act that are engaged in producing goods or providing the services listed under Table A or Table B of the Rule. 

Section 148 : an overview 

Audit of the annual account of any company is one of the important and inseparable parts of any incorporated business, and it is always carried out and managed by a specialised skill set, which is the reason why the shareholders of the company appoint auditors.

Section 148(1): The Central Government, may, by order, in respect of the class of companies engaged in the production of goods or provide services, and maintain particulars related to raw materials, or labours or any other items of cost, also including them in the books of account kept by the class of the company. 

Proviso of Section 148(1): The Central Government, before they issue any such order concerning any such class of the companies regulated by a Special Act, consults the regulating body established under this Special Act. 

Section 148(2): Every company specified in Item A of Rule 3 of the Companies (Cost Record and Audit) Rules, 2014, shall get their cost record audited by following these rules during the immediately previous financial year: 

• The overall annual turnover of the company should be Rs. 50 crore or more.
• The aggregate turnover of the individual product(s)  or service(s) for which the cost record is required to be maintained should be Rs. 25 crore. 

Every company specified in Item B of Rule 3 of the Companies (Cost Record and Audit) Rules, 2014, shall get their cost record audited by following these rules during the immediately previous financial year: 

• The annual turnover of the company from all the products and services is Rs. 100 crore or more.
• The aggregate turnover of the individual product(s)  or service(s) for which the cost record is required to be maintained should be Rs. 35 crore or more.

The cost audit under these rules shall not apply to a company that is covered in Rule 3 (General Exceptions for certain companies to which the rule would not apply):

• The revenue from exports and foreign exchange exceeds 75% of the total revenue.
• The company operates in a Special Economic Zone.
• The company is engaged in the production of electricity for captive consumption through a generating plant. 

Section 148(3): Appointment and Remuneration of the Cost Audit

The audit shall be conducted by the cost accountant, who shall be appointed by the Board on such remuneration as may be determined by the members in such manner as may be prescribed: 

Provided that under Section 139, no statutory auditor shall be appointed as a cost auditor of the company. 

It is further provided that the auditor conducting the cost audit shall comply with the cost auditing standards. 

Section 148(4): States that an audit conducted under this section shall be in addition to the audit conducted under Section 143 (Power and duties of auditors and auditing standards). 

Section 148(5): The cost auditor appointed under this section has all the obligations like qualification, disqualification, rights, and duties that shall be applicable and it shall be the duty of the company to give all the assistance and facilities to the cost auditor to audit the cost records of the company.

Provided that the report is prepared by the cost accountant on the audit of the cost record, which shall be submitted to the Board of Directors.

Section 148(6): After the submission of the audit of the cost record report to the company, the company shall, within 30 days from the date of receipt of a copy of the cost audit report prepared in pursuance of the direction of the Central Government under sub-section (2), furnish all the information and explanation on every reservation or qualification contained therein.

Section 148(7): Filing of the Cost Audit Report to Central Government

Within 30 days from the receipt of the copy of the cost audit, the company shall furnish the Central Government with full information and explanation on every reservation or qualification contained therein. The Central Government may demand the classification of the same  

Section 148 (8): Any default is made in complying with the provisions of this section:

(a) The company and every officer shall be punishable in the manner provided in subsection (1) of Section 147.

(b) The cost auditor who is in default shall be punishable in the manner provided in subsections (2) and (4) of Section 147.

Legislative history

Right after independence, large-scale industrialisation took place. A lot of privileges and facilities were provided to entrepreneurs to establish industrial undertakings. The main issue was the excessive price, which encouraged smuggling and other malpractices such as under-invoicing of imported goods to save on customs duties or over-invoicing of exports to get a higher export benefit. This is the reason why Section 209(1)(d) (Section 209 provides that the company needs to maintain books of account and penalties can be imposed if not complied with) of the Companies Act, 1956 was introduced. Information on the input cost of products, machine utilisation, unit selling price, profitability of the individual products, etc., was required to be maintained. The main objective of the cost audit was to introduce the provision of the Companies Act 1956 that regulating pricing mechanisms in key industries like cement, sugar, textiles, and consumer goods is necessary to ensure fairness and transparency and meet consumer needs. Implementing regulations promotes stability, sustainability, and economic growth.     

The Companies Act of 1988 introduced changes related to the maintenance of cost audits and the appointment of qualified persons to conduct them. The Act also imposed a ceiling on the number of cost audits a firm of cost accountants can perform, similarly to the ceiling for a firm of chartered accountants. The provision of Section 224(B) that applies to statutory auditors regarding the audit ceiling also applies to cost auditors. In the Companies Act of 2013, the audit should be under the Companies (Cost Record and Cost Audit) Rules, which are set by the Central Government under Section 469. All the manufacturing sectors are now linked to their respective Central Tariff Codes for easy and accurate identification. 

Scope of Section 148

The section relates to Section 233B of the Companies Act, 1956. It seeks to empower the Centre government, after consultation with the regulatory body, to direct the class of companies engaged in the production of such goods or provision of such services as may be prescribed to include in the book of account particulars relating to the utilisation of material or labour or such other cost items. The central government could require the audit of the company’s cost records by the cost accountant chosen by the Board and on the terms established by the members. 

• The Board has to appoint a cost accountant in practice who shall conduct the audit.
• No person appointed under Section 139 of the Act as an auditor of the company shall conduct the audit of the cost record. 
• The auditors have to comply with the cost auditing standards issued by the Institution of Cost Accountants of India while conducting cost audits. 
• The company has to provide all the assistance and facilities to the cost auditors for conducting the auditing of the company.

The cost audit could be ordered only concerning a company engaged in production, processing, manufacturing, or mining activities. The Central Government framed rules in respect of industries of the nature referred to above, providing maintenance to particulars relating to the utilisation of material or labour or other items of costs in the books of account.

Categories of companies for which central government may specify audit of cost of items 

The class of companies, including the foreign companies, engaged in the production of the goods or providing the service specified in Annexure A (mentioned below), having an overall turnover from all the products and services of Rs. 35 crores or more during the immediately preceding financial year, shall include cost records for such products or services in their book of account. 

Applicable rules to be read with Section 148 of the Companies Act, 2013 

As mentioned above, the legal provisions regarding the cost audit are laid down in Section 148 of the Act, read with the Companies (Cost Records and Audit) Rules, 2014 (Cost Audit Rules). 

• For the company and its officers: According to Section 147(1), the firm is penalised with a fine of not less than Rs. 25 thousand but not more than Rs. 5 lakhs, and each officer of the company who is in default is obliged to pay Rs. 10 thousand but can be extended up to Rs. 1 lakhs. Before the modification, the company’s officers were subject to imprisonment. According to the most recent revision, officers can now only be fined for any infringement. 
• For the cost auditor of the company: As per Section 147(2) to (4), the cost auditor shall be punishable with a fine not less than Rs. 25 thousand but which may be extended to four times the remuneration of the auditor, whichever is less. It is provided in the section that if the auditor has the intention, whether knowingly or willingly, to deceive the company, its shareholders or the creditor, shall be punishable with imprisonment of one year and a fine which shall not be less than Rs. 50 thousand but which may be extended up to Rs. 25 lakhs or eight times the remuneration of the auditor, whichever is less. Further, in addition, the auditor who has been convicted shall be additionally liable to i) refund the remuneration of the company and ii) to pay for the damages to the company, statutory bodies, or the authorities for the loss arising out of the misleading statement of the particulars made in his audit. 

Major key issues

1. Cost audit may not be applicable to all the companies: As per Section 148(1) of the Act read with Rule 3 of the Cost Audit Rules, the Central Government may by order ask for the cost accounting of records of certain companies providing goods and services only, especially the company engaged in the manufacturing of the goods and providing the service. This forms the only basis for the concept of the cost audit, i.e., only the manufacturing companies or the companies providing the service are to be cost audited. Hence, all companies are optional to maintain cost audit records.

Further, Rule 3 of the Cost Audit Rules lays down a turnover of Rs. 35 crore, and if any company has a more significant turnover in the immediately proceeding financial year, it would be required to maintain the cost records. Such companies have been further categorised and tabulated in Table A (Regulated Sector) and Table B (Non-Regulated Sector) of the code. 

Rule 4(3)(i) provides for the general exceptions for certain companies for which the cost audit is not applicable: 

• The revenue exceeds the exports; in the foreign exchanges, exceeds 75% of its total revenue, or, 
• Which are operating from a special economic zone
• The company engaged in the generation of electricity for captive consumption through the Captive Generating Plant. For this purpose, the term “Captive Generating Plant”, shall have the same meaning as assigned in Rule 3 of the Electricity Rules, 2005. 

2. Effects of the decriminalisation by the 2020 Amendment Act: In the Companies (Amendment) Act, 2020, the word “with the imprisonment for a term which may be extended to one year” was omitted from Section 148. Thus, in short, the punishment was decriminalised. This flows directly from the application of Section 6 of the General Clauses Act of 1897, which provides that in case any law is repealed, anything that was not in force or existing at the time of such repeal cannot be revived. 
3. Limitation under Section 468 of the Criminal Procedure Code, 1973 (CrPC): Section 468 of the Criminal Procedure Code provides for a limitation period of six months from the commission of the offence in cases where the offence is punishable with a fine only. In this case, in any proceeding under Section 148 of the Act, wherein a person is sought to be punished, such limitations would have to be respected. In the case of Vikram Kapur v. Deputy Registrar of Companies (2022), it was held by the Madras High Court that since the complaint was filed in 2018 for the contravention of Section 148 of the Act, the proceedings under Section 468 were beyond the limitations of the Code.

Judicial pronouncements

M/S.Jindal Steel & Power Ltd v. Commissioner of Central Excise, Raipur (2013)

Background of the case

In the present case, the respondent was the manufacturer of the sponge iron and other iron and steel-producing products chargeable to the Central Excise Duty. During the period of dispute, i.e., from November 1999 to August 2000, they installed additional machinery to enhance the power generation capacity and availed capital goods. The department is of the view that since the electricity is non-excisable and since the bulk of the electricity was sold to the State Electricity Board during the period of dispute, the power generated by the captive power plant was more than the respondent’s actual requirement, which issued the show cause notice for denying Cenvat credit along with interest and the imposition of a penalty. 

Held

It was held in this case that if the company has not been determined as per the CAS-4( Cost Accounting Standards) method of valuation, the respondent should have fulfilled the condition for claiming the excise duty exemption. However, it was subsequently corrected, and differential duty was paid by way of issuing supplementary invoices to the recipients. 

RAD-MRO Manufacturing Pvt. Ltd v. Commer. Of C.Ex., Bangalore (2009)

Background of the case

In this case, a show cause notice was issued on the ground that M/s. RAD-MRO Manufacturing Pvt. Ltd. and M/s. MRO TEK Ltd. are to be treated as related persons since MRO TER utilises all the Populated Printed Circuit Boards purchased from the RAD-MRO for captive consumption, The value has to be determined as per Central Excise Valuation (Determination of Price of Excisable Goods), 2000, following the CAS-4. The Commissioner has upheld the demand as proposed in the show cause notices and also imposed a penalty equal to the amount u/s 11AC of the Central Excise Act, 1944, and demanded interest. 

Held

In this case, it was held that the related party’s transaction was intended to evade excise duty payment, as the price declared for the sale was mutually agreed upon and was lower than the CAS-4 (Cost Accounting Standard) for a particular portion of the time. Since it is revenue-neutral, the buyers can take cenvat credit, and no evidence is brought out for evasion of duty, the decision was set aside. 

Conclusion 

Cost audit provisions are regulatory and report-seeking in nature, and so far as they are complied with, there is no impact or restriction resulting from them. However, many companies that are covered under the cost audit, have not complied and, till lately, have never been questioned. The MCA may have recently been issuing SCNs and trying to ensure stricter compliance, but with the decriminalisation (which is, of course, welcome) that has been recently done and with the passage of time and limitations as explained above, the fate of these proceedings now initiated by the MCA is yet to be determined.

Annexure A

The companies, including foreign companies, engaged in the production of the goods or providing services specified in the table below, having an overall turnover from all their products and services of Rs. thirty-five crore or more during the immediately preceding financial year, shall include cost records for such products or services in their books of account, namely:

• Regulated Sector, namely: Drugs, pharmaceuticals, fertiliser, petroleum products, sugar, and industrial alcohol.
• Non-Regulated Sector: Turbo jet and propeller, Arms and Ammunition and Explosive, Radar apparatus, Iron and steel, etc.  

Frequently Asked Questions (FAQs) 

What is the difference between a statutory auditor and a cost auditor?

The statutory auditor cannot be appointed as the cost auditor of the company, whereas the cost auditor will be appointed by the board, and in the case of such companies’ audit committees, the appointment and remuneration will be recommended by the audit committee. 

What is the due date for filing the cost audit report, and to whom should it be submitted? 

As per Rule 6(5) of the Companies (Cost Records and Audit) Rules, every cost auditor is required to submit his report to the Board of Directors of the company within 180 days from the closure of the financial year. 

References 

• https://www.mondaq.com/india/accounting-standards/1324404/cost-audit-legal-provisions-and-issues 
• https://www.icsi.edu/media/portals/86/Geeta_Saar_108_CG_to_Specify_Cost_Audit_for_Certain_Companie.pdf
• https://icmai.in/upload/Students/Circulars/Companies-Rules-2014.pdf 
• https://corporatelawreporter.com/companies_act/section-148-of-companies-act-2013-central-government-to-specify-audit-of-items-of-cost-in-respect-of-certain-companies/ 
• https://taxguru.in/company-law/cost-audit-companies-act-2013-rules.html 
• https://www.taxmann.com/post/blog/filing-of-complaint-after-limitation-was-abuse-of-law-hc/