All about Cost Audit Applicability under Companies Act 2013

Cost Audit applicability:

A cost audit is concerned with the verification of cost records/accounts and acts as a check on the adherence to cost accounting standards. Section 148 of the Companies Act 2013 confers powers on the Central Government to direct certain classes of companies to get their cost records maintained and audited by a cost accountant.

Here in this blog, an effort is made to throw light on cost audit applicability and the provisions relating to cost audit under the Companies Act 2013.

Maintenance of cost records

Some companies marked under the law are asked to maintain cost records for their products or services in the books of accounts. Let’s see which are these companies.

These are the companies that are engaged in the production of goods or provision of services of items as mentioned under Table (A) and Table (B) of Rule 3 of the Companies (Cost Records and Audit) Rules, 2014.

Now, the point is “are all these specified companies required to maintain cost records”? The answer is no.

A company should maintain cost records in respect of only such products and services as are mentioned in Rule 3. Moreover, this is applicable only if the aggregate turnover from all its products and services (overall business) is Rs. 35 crores or more during the immediately preceding financial year.

Simply put, a company needs to maintain cost records if all the following conditions are satisfied:

1. The company must be engaged in the production of such goods or services which are tabulated under Rule 3,

2. The company’s overall turnover (i.e., not just from the specified goods/services) should be Rs. 35 crores or more, and

3. Cost records should be maintained for only the specified goods/services.

Cost audit applicability

Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 prescribes the list of companies on which cost audit is applicable. The following are the conditions defining the applicability criteria of cost audit to certain companies. Let us have a look at these.

Table showing cost audit applicability

Category	Condition 1	Condition 2
For companies specified under Table (A) of Rule 3	Annual turnover from all products and services (overall business) during the immediately preceding FY = Rs. 50 crores or more	Aggregate turnover from the individual products or services mentioned under Rule 3 for which cost records are to be maintained = Rs. 25 crores or more
For companies specified under Table (B) of Rule 3	Annual turnover from all products and services (overall business) during the immediately preceding FY = Rs. 100 crores or more	Aggregate turnover from the individual products or services mentioned under Rule 3 for which cost records are to be maintained = Rs. 35 crores or more

Cost audit applicability under MCA

Cost audit becomes applicable where both conditions 1 and 2 are satisfied

Both the above conditions must be satisfied to construe and draw the applicability of cost audit provisions towards a particular company.

Exemptions from Cost audit applicability

There are some instances where cost audit will not apply to a company even though it meets the criteria laid down under Rule 4. These exceptions include:

• A company whose revenue from exports (in foreign exchange) exceeds 75% of its total revenue
• A company which is operating from an SEZ
• A company which is engaged in the generation of electricity for captive consumption through Captive Generating PIant

The time limit for appointment of cost auditor

Every company to which a cost audit is applicable needs to appoint a cost auditor within 180 days of the commencement of every financial year.

Intimation of appointment to Central Government

On the appointment of the cost auditor, the same has to be intimated by the company to the Central Government in e-Form CRA-2. This notice is to be made within 30 days of the board meeting in which the auditor is appointed or within 180 days of the commencement of the financial year, whichever is earlier.

Appointment and Remuneration of cost auditor

The Board of Directors of a company appoints its cost auditor and his remuneration is ratified by shareholders subsequently.

But, in the case of a company that is required to constitute an audit committee, the appointment, and remuneration of the cost auditor is to be recommended by the audit committee. It is then considered and approved by the Board of Directors and ratified by shareholders subsequently. {Rule 14 of the Companies (Cost Records and Audit) Rules, 2014}

To be eligible to be appointed as a cost auditor, the concerned party must be a cost accountant or a firm of cost accountants in practice. Also, the cost audit must be conducted in compliance with the cost auditing standards issued by the Institute of Cost Accountants of India.

Further, as per Section 148 (3), a statutory auditor of the company appointed under Section 139 cannot serve as a cost auditor.

Tenure of cost auditor and casual vacancy

A cost auditor appointed under Section 148 continues in such capacity till the expiry of 180 days from the closure of the financial year or until he submits the cost audit report for the relevant financial year. However, the company has a right to remove him from office before the expiry of his term, through a board resolution, and after giving him a reasonable opportunity of being heard.

Also, it is worth noting here that nothing can prejudice the right of the cost auditor to resign from such office of the company.

When a casual vacancy is formed in the office of a cost auditor, either due to resignation, death or removal, it is filled up by the Board within 30 days of occurrence and the company informs the Central Government in e-Form CRA-2 within 30 days of such appointment.

Cost Audit Report {Rule 6 of the Companies (Cost Records and Audit) Rules, 2014}

On the completion of the cost audit, the cost auditor is required to submit his duly signed cost audit report to the company’s Board in e-Form CRA-3. Such a report has to be furnished within 180 days from the closure of the financial year to which the report relates. The report should provide the auditor’s reservations, observations, or suggestions if any.

Filling of Cost Audit Report to Central Government {Rule 6 of the Companies (Cost Records and Audit) Rules, 2014}

After examining the cost audit report and within 30 days of its receipt, the Board of Directors of the company needs to furnish such report to the Central Government in e-Form CRA-4 along with full information and explanation on every reservation or qualification contained therein. The form is filed using the XBRL taxonomy. The Central Government may call for any further information or explanation if needed. {Section 148 (6) an (7)}

Penalty on non-compliance {Section 148 (8)}

If any of the provisions of cost audit under Companies Act 2013 have defaulted, then the company, cost auditor, and every officer of the company who is in default are subject to punishment under Section 147.

• Punishment for the company: Fine of Rs. 25,000 to Rs. 5 lakhs
• Punishment for the defaulting officers of the company: Detention up to 1 year or fine of Rs. 10,000 to 1 lakh or both
• Punishment for the defaulting cost auditor: Fine of Rs. 25,000 (extendable to Rs. 5 lakhs or 4 times his remuneration, whichever is less)
• Punishment for the defaulting cost auditor where it is proved that the contravention is willfully made to deceive the company or its shareholders: Detention up to 1 year and fine of Rs. 50,000 (extendable to Rs. 25 lakhs or 8 times his remuneration, whichever is less)

Extension in filing cost audit report via General Circular No. 29/2020 dated 10^th September 2020

Due to the impact of the Covid-19 pandemic, MCA has extended the time limit for filing e-Form CRA-4 for the financial year 2019-20. It has been provided that where the cost audit report is furnished by the cost auditor by 30^th November 2020 on account of Covid-19 disruptions, it will not be viewed as a violation and consequently, companies must file e-Form CRA-4 to the Central Government within 30 days of its receipt.

Furthermore, the companies who have sought an extension in holding their AGMs have been granted leeway on this timeline and may file e-Form CRA-4 within the resultant extended period of filing financial statements.

Annexures showing cost audit applicability

Companies specified under Table (A) of Rule 3

Regulated Sectors 

Sl.  No.	Industry/ Sector/ Product/ Service	“Customs Tariff Act Heading”(wherever applicable)
1.	Telecommunication services made available to users by means of any transmission or reception of signs, signals, writing, images and sounds or intelligence of any nature and regulated by the Telecom Regulatory Authority of India under the Telecom Regulatory Authority of India Act, 1997 (24 of 1997); including activities that requires authorisation or license issued by the Department of Telecommunications, Government of India under Indian Telegraph Act, 1885 (13 of 1885);	Not applicable.
2.	Generation, transmission, distribution and supply of electricity regulated by the relevant regulatory body or authority under the Electricity Act, 2003 (36 of 2003);	Generation- 2716; Other Activity- Not Applicable
3.	Petroleum products; including activities regulated by the Petroleum and Natural Gas Regulatory Board under the Petroleum and Natural Gas Regulatory Board Act, 2006 (19 of 2006);	2709 to 2715; Other Activity- Not Applicable
4.	Drugs and pharmaceuticals;	2901 to 2942; 3001 to 3006.
5.	Fertilisers;	3102 to 3105.
6.	Sugar and industrial alcohol;	1701; 1703; 2207.

Companies specified under Table (B) of Rule 3

Non-regulated Sectors 

Sl. No.	Industry/ Sector/ Product/ Service	“Customs Tariff Act Heading” (wherever applicable)
1.	Machinery and mechanical appliances used in defence, space and atomic energy sectors excluding any ancillary item or items; Explanation. – For the purposes of this sub-clause, any company which is engaged in any item or items supplied exclusively for use under this clause, shall be deemed to be covered under these rules.	8401; 8801 to 8805; 8901 to 8908.
2.	Turbo jets and turbo propellers;	8411
3.	Arms and ammunitions and Explosives;	3601 to 3603; 9301 to 9306.
4.	Propellant powders; prepared explosives (other than propellant powders); safety fuses detonating fuses; percussion or detonating caps; igniters; electric detonators;	3601 to 3603
5.	Radar apparatus, radio navigational aid apparatus and radio remote control apparatus;	8526
6.	Tanks and other armoured fighting vehicles, motorised, whether or not fitted with weapons and parts of such vehicles, that are funded (investment made in the company) to the extent of ninety per cent, or more by the Government or Government agencies;	8710
7.	Port services of stevedoring, pilotage, hauling, mooring, re-mooring, hooking, measuring, loading and unloading [services rendered for a Port in relation to a vessel or goods regulated by the Tariff Authority for Major Ports under the Major Port Trusts Act, 1963 (38 of 1963)];	Not applicable.
8.	Aeronautical services of air traffic management, aircraft operations, ground safety services, ground handling, cargo facilities and supplying fuel rendered [at the airports] and regulated by the Airports Economic Regulatory Authority under the Airports Economic Regulatory Authority of India Act, 2008 (27 of 2008);	Not applicable.
9.	iron and Steel;	7201 to 7229; 7301 to 7326
10.	Roads and other infrastructure projects corresponding to para No. (1) (a) as specified in Schedule VI of the Companies Act, 2013 (18 of 2013);	Not applicable.
11.	Rubber and allied products; including products regulated by the Rubber Board constituted under the Rubber Act, 1947 (XXIV of 1947);	4001 to 4017
12.	Coffee and tea;	0901 to 0902
13.	Railway or tramway locomotives, rolling stock, railway or tramway fixtures and fittings, mechanical (including electro mechanical) traffic signalling equipment’s of all kind;	8601 to 8608, [8609]
14.	Cement;	2523; 6811 to 6812
15.	Ores and Mineral products;	2502 to 2522; 2524 to 2526; 2528 to 2530; 2601 to 2617
16.	Mineral fuels (other than Petroleum), mineral | oils etc.;	2701 to 2708
17.	Base metals;	7401 to 7403; 7405 to 7413; 7419; 7501 to 7508; 7601 to 7614; 7801 to 7802; 7804; 7806; 7901 to 7905; 7907; 8001; 8003; 8007; 8101 to 8113.
18.	Inorganic chemicals, organic or inorganic compounds of precious metals, rare-earth metals of radioactive elements or isotopes, and Organic Chemicals;	2801 to 2853; 2901 to 2942; 3801 to 3807; 3402 to 3403; 3809 to 3824.
19.	Jute and Jute Products;	5303, [5307], 5310
20.	Edible Oil;	1507 to 1518
21.	Construction Industry as per para No. (5) (a) as specified in Schedule VI of the Companies Act 2013 (18 of 2013);	Not applicable.
22.	Health services, namely functioning as or running hospitals, diagnostic centres, clinical centres or test laboratories;	Not applicable.
23.	Education services, other than such similar services falling under philanthropy or as part of social spend which do not form part of any business.	Not applicable.
24.	Milk powder;	0402
25.	Insecticides;	3808
26.	Plastics and polymers;	3901 to 3914; 3916 to 3921; 3925
27.	Tyres and tubes;	4011 to 4013
28.	[Pulp and Paper];	[4701 to 4704],4801 to 4802.
29.	Textiles;	5004 to 5007; 5106 to 5113; 5205 to 5212; 5303; [5307] 5310; 5401 to 5408; 5501 to 5516
30.	Glass;	7003 to 7008; 7011; 7016
31.	Other machinery and Mechanical Appliances;	8402 to 8487
32.	Electricals or electronic machinery;	8501 to 8507; 8511 to 8512; 8514 to 8515; 8517; 8525 to 8536; 8538 to 8547.
33.	Production, import and supply or trading of following medical devices, namely: – Cardiac stents; Drug eluting stents; Catheters; Intra ocular lenses; Bone cements; Heart valves; Orthopaedic implants; Internal prosthetic replacements; Scalp vein set; Deep brain stimulator; Ventricular peripheral shud; Spinal implants; Automatic impalpable cardiac [defibrillators], Pacemaker (temporary and permanent); Patent ductus arteriosus, atrial septal defect and ventricular septal defect closure device; Cardiac re-synchronize therapy; Urethra spinicture devices; Sling male or female; Prostate occlusion device; and Urethral stents:	9018 to 9022″].

Rule 3 does not apply to a company that is classified as a micro-enterprise or a small enterprise.

Takeaway – Cost audit’s important timelines are shown below:

Hope the information provided in this blog proves helpful to you!

You might also like:

---