This is with reference to the above referred Draft Companies (Cost Records and Cost Audit) Rules, 2013. We are shocked to see the contents of these draft rules which, if finalized in present form, shall throw the Cost Accounting framework of India around 40 years back and against the views and requirements for COST ACCOUNTING FRAME WORK expressed by the (A) Govt. in Parliament in different times. (B) Recommendation of Committee on Subordinate Legislation (14th Lok Sabha 2004-2005) dated 02/12/2004. (C) Standing Committee Report relating to Companies Bill, on the basis of the which The Companies Act 2013 has been framed. (D) Recommendation of the “Expert Committee on New Company law” (Chaired by Dr. J.J. Irani, MD of TISCO) setup by the MCA, GOI which made it recommendation in the year 2005. (E) Competition commission of India & price regulatory authorities like National Pharmaceutical Pricing Authority (F) Judgments of Supreme Court on Commissioner of Central Excise, Mumbai Vs. M/s. Fiat India (P) Ltd. & ANR. Vide Civil Appeal Nos. 1648-1649 of 2004 unearthing Rs 400 crores as revenue leakage based on a COST AUDIT REPORT. (G) Revenue Authorities like CBEC, CBDT etc (H) Recommendation of Expert Committee formed by MCA in 2009 and its implementation in 2011-2012. (A) Govt. in Parliament in different times : (a) Importance of Cost Accounting: has already been recognized by Govt. of India on many occasions. In moving the Cost and Works Accountants Bill for reference to the Joint Committee, the Deputy Minister of Commerce and Industry explained the nature and purpose of cost accounting as follows (Lok Sabha Debates, Vol. XXIV, dated 20th December, 1958, pp. 6608-09): “Cost accounting is a function entirely different from general or financial accounting. Cost accountancy covers a wide range of subjects, with special emphasis on cost accounting, factory organization and management, engineering techniques, and knowledge of the working of the factories. The cost accountant performs services involving pricing of goods, preparation, and verification, certification of cost accounts and related statements, or recording presentation or certification of cost facts or data. In a manufacturing concern, he works out the economical cost of production and evaluates its progress at each stage of production. In mass production enterprises, he points out wastage of manpower due to overstaffing or inefficient organization and indicates the output, the capacity of the machines and labour, the stock position, the movement of stores and weakness in the production process. The systematic determination of cost in every single and distinct process of manufacturing provides a continuous check on the margin of waste in the processing of raw and semi-finished materials, on the utilisation of machinery installed, on manpower expended and the percentage of rejection of finished products. This pinpoints also the particular process in which defects and deficiencies exist, thereby enabling immediate remedial measure being taken. Costing, in short, aims at making the organization efficient and economical, by providing the minimum of labour and material and getting the full capacity of the machine output. The cost accountant, therefore, is concerned solely and mainly with the internal economy of the industry, and renders services essential to the day-to-day management of the undertaking.” (b) Importance of maintenance of Cost Accounting Records : The Expert Group noted that in the Object & Reasons of the Bill seeking insertion of clause (d) under sub-section (1) of section 209 of the Companies Act, 1956, in the Report of the Joint Select Committee, and in the statements of the then Hon’ble Finance Minister made in reply to the debate in Rajya Sabha, it was stated that (a) maintenance of proper cost accounting records by the companies is essential which would make the efficiency audit possible; (b) all companies belonging to class of companies engaged in the production, processing, manufacturing or mining activities to include in their books of account particulars relating to the utilisation of materials, labour or other items of cost; and (c) every producing/manufacturing company to employ a cost accountant and to have a cost accountant’s report in regard to the product(s) that it produces. In this regards, please note the Statements of the then Hon’ble Finance Minister of India, Shri T.T. Krishnamachari, made in 1965 in reply to the Debate in Rajya Sabha on introduction of sections 209(1)(d) and 233B in the Companies Act, 1956 that very clearly supported the view that when we would have sufficient number of cost accountants in the country (presently there are nearly 45,000 cost accountants in India), every producing/manufacturing company shall be covered by the mechanism of cost accounting records and cost audit. “while we have made it obligatory or rather semi-obligatory to employ Cost Accountant, it is our intention to ask certain industries to have a cost accountant’s report.” “when we can have sufficient number of Cost Accountants so as to make it obligatory for every company, every producing concern and every manufacturing concern, to have a cost accountant’s report.” “we are really making it possible for the institution of Cost Accountants to grow so as to enable the Government some time later to make every manufacturing company employ a Cost Accountant, and have a cost accountant’s report in regard to the cost of product that it produces.” (c) Opinion of Deptt. of Company Affairs: As per Committee on Subordinate Legislation (Fourteenth Lok Sabha) in its First Report (Chapter-III) submitted on 2nd December 2004, The Department of Company Affairs had opined in front of them that the main objective of cost audit when introduced was mainly to meet Government requirements for regulating the price mechanism in certain industries and that in the present scenario authentic cost data base is not only essential for the industries to improve upon their performance and face competitive environment but is useful to various Government agencies, revenue authorities, regulatory bodies, banks and financial institutions for meeting their respective objectives. The Committee note that one of the objects of the Companies (Second Amendment) Bill, 1964, [which on enactment became Companies (Amendment) Act, 1965] as stated in the Statement of Objects and Reasons appended to the Bill, was “to strengthen the provisions relating to investigation into the affairs of Companies and to provide for more effective audit in dealing with cases of dishonesty and fraud in the corporate sector”. This is the need of the hour when our country is facing huge inflation due to Supply side issues which can be tackled with strict control over costs only. (B) Recommendation of Committee on Subordinate Legislation (14th Lok Shabha 2004-2005) dated 02/12/2004: “3.12 The Committee regret to note that even 38 years after enactment of the relevant provisions empowering theGovernment to prescribe Cost Accounting Records Rules (CARRs), these have not been framed to cover all major industries/projects” 3.13 Service sectors such as Banking, Insurance, Health Services, Education, Hotel, etc. have admittedly “attained strategic importance to the economy and the public at large, particularly after opening up of the economy for private/foreign companies”. It has been stated that an authentic cost data base is of paramount importance to various existing and new regulatory bodies, Competition Commission and GovernmentDepartments for fixation of user charges in respect of services provided by them and would go a long way in fulfilling their respective objectives. The existing provisions of the Companies Act, however, do not require formulation of CARRs for service industries. The Committee feel that absence of ‘enabling’ provision in the Companies Act should not be a reason for not prescribing CARRs for service industries. If the need for cost audit is otherwise found to be vital for service industries, the Committee emphasize that expeditious action should be taken to remove the lacuna in the Companies Act by suitably amending it.” (C) Standing Committee Report relating to Companies Bill, on the basis of the which The Companies Act 2013 has been framed : 10.67 The Committee note that a suggestion has been made for mandating maintenance of cost records for every company with the power to the Central Government to exempt a company or class of companies from these provisions in public interest. Although the Committee agree that maintenance of cost records and cost control are important management instruments, the Committee note that the Irani Committee had felt that maintenance of cost records should not be made mandatory and the existing arrangement should continue. However, keeping in view the significance of cost control for industry, the Committee recommend that the Ministry may consider the above suggestion positively for appropriate coverage of corporate sector for mandatory maintenance of cost records. (D) Recommendation of the “Expert Committee on New Company law” (Chaired by Dr. J.J. Irani, MD of TISCO) setup by the MCA, GOI which made it recommendation in the year 2005. The Committee observed that “At present, the Companies Act contains provision relating to maintenance of Cost Records u/s 209(1)(d) and Cost Audit u/s 233B of the Companies Act in respect of specified industries. The Committee felt that Cost Records and Cost Audit were important instruments that would enable companies make their operations efficient and exist in a competitive environment. (E) Competition commission of India & Competition commission of India & price regulatory authorities like National Pharmaceutical Pricing Authority The Competition Commission of India has always held the availability of the Audited Cost information as an important aid to their activity. For example it is understood that very recently CCI wrote to the Cost Audit Branch and took an extensive analysis of Cost Audit reports of Cement companies which have help them to reach a conclusion on profiteering by the cartail, the report of which are in Public domain. (F) Judgments of Supreme Court on Commissioner of Central Excise, Mumbai Vs. M/s. Fiat India (P) Ltd. & ANR. Vide Civil Appeal Nos. 1648-1649 of 2004 unearthing Rs 400 crores as revenue leakage based on a COST AUDIT REPORT. In a land mark Judgement concerning Assessable Value U/s 4 of the Central Excise Act, 1944 the Apex Court has held that wherever the Assessable value of a product cleared from the factory by a entity is less than the cost of production of the product computed in accordance with the cost accounting principles the assessable value shall be taken as the cost of production. The judgment was based on a cost audit report. (G) Revenue Authorities like CBEC, CBDT etc U/s 92E of the Income Tax Act, 1961 a report from an accountant is required to furnished for determination of Transfer Pricing. The rules for the same suggest five methods for such determination out of which four are based on costs. The costs for these can be determined satisfactorily only if a validated cost information is available. Similarly CBEC has specified that the determination of valuation of Captive Consumption and transfer to Related parties will be based on Cost Accounting Standard 4 information for which can be obtained from validated cost accounting records. Similarly the transportation cost is required to be assessed as per cost accounting standard 5. While the above are the requirements under the different Revenue Acts & Rules discussed above the Draft Companies (Cost Records and Cost Audit) Rules, 2013 exempt majority of the companies to maintain such cost information. (H) Recommendation of Expert Committee formed by MCA in 2009 and its implementation in 2011-2012. The MCA had at its own initiatives set up the Expert Group consisting of representatives of Industry Association like CII and ASSOCHAM, PHD Chamber of Commerce representatives of ICAI, ICWAI, ICSI, Director Cost of CAB, MCA, GOI under the chairmanship of the Advisor ( Cost), MCA, GOI. The committee after prolonged deliberation of two years submitted its report to MCA. The MCA for restructuring the various cost accounting record rules the Cost Audit Report Rules 2001. Based on this report the MCA framed the Cost Accounting Record Rules 2011 and the Cost Audit Report Rules 2011 and issued Cost Audit Orders. The order (a) covered all Companies engaged in manufacturing, mining, production and processing activities with turnover of Rs. 20 Crores or more or Networh of Rs. 5 crores or Listing with Stock Exchanges by the cost accounting record rules. (b) Six Industries under regulatory authorites above turnover of Rs. 20 crores, (c) All other companies with turnover exceeding Rs. 100 crores covered under Cost Audit, (d) Companies with turnover exceeding Rs. 20 crores but less than Rs. 100 crores were covered by the Cost Compliance requirements. The rules also addressed the demands of the Industry to keep their cost information confidential. It is estimated that the above rules draft 95% of the companies within the frame work of cost accounting record and audit. Surprisingly instead of allowing the concept to stabilize the existing rules, the MCA has come out with the present draft rules, which if implemented, will take out 95% the companies outside the framework of not only cost audit but also maintenance of cost accounting records. Suggestions on the Draft Companies (Cost Records and Cost Audit) Rules 2013: In the light of the above submission it is suggested that the draft rules are revised in the following manner : 1. Definitions & Interpretations: Various important definitions and interpretations properly covered under the Companies (Cost Accounting Records) Rules 2011, the Companies (Cost Audit report) Rules 2011 and 6 sector specific CARR are missing under subject Draft Rules. The same needs to be incorporated in detail like existing rules. 2. Applicability: (a) Compliance Report: Considering the various recommendations of some high powered Committees and Expert Group appointed by Govt. of India, it is requested to continue with the existing practice of maintenance of Cost records and submission of Compliance Report following the various criterion prescribed in the existing CARRs. You are requested to consider the existing format of Compliance report prescribed in those rules. (b) Cost Audit: All the industries and products/services confirming to the prescribed criterion already covered under existing Cost Audit Order no. 52/26/CAB-2010 dtd. 06-11-2012 should be covered under subject draft rules also. (c) Companies engaged in Strategic Sectors: Although there are very few organizations which are working as a COMPANY, we still welcome the inclusion of this sector in the Cost Accounting framework. (d) Sectoral Companies: In-depth details related to Cost records rules for these 6 sectoral Companies are to be incorporated as in existing 6 sector specific Cost record Rules. (e) Service Sector: Various Government authorized Committees and Expert Groups since 2004 have insisted on strategic importance of bringing Service sectors such as Banking, Insurance, Health Services, Education, Hotel, etc. within the framework of Cost Records and Cost Audit. 3. Maintenance of records: Various important clauses related to records maintenance needs to be prescribed in details as in existing CARRS, like following Cost Accounting Principles & Cost Accounting Standards, reconciliation of records with the financial records, timeline for keeping the records in goods order & persons responsible for this compliance etc. Prescribed Form “I” is still not provided along with Draft Rules. It is requested to not going back to proforma based records maintenance (except for Sector regulated companies) and continue with the existing provisions of records maintenance prescribed in existing CARRs. 4. Inclusion of Service Sectors: Observations/recommendations made by the Committee on Subordinate Legislation (Fourteenth Lok Sabha) in its First Report submitted on 2nd December, 2004. The Committee said that Service sectors such as Banking, Insurance, Health Services, Education, Hotel, etc. have admittedly “attained strategic importance to the economy and the public at large, particularly after opening up of the economy for private/foreign companies”. It has been stated that an authentic cost data base is of paramount importance to various existing and new regulatory bodies, Competition Commission and Government Departments for fixation of user charges in respect of services provided by them and would go a long way in fulfilling their respective objectives. Justifications for suggestion made above: We hereby request you to consider our above mentioned suggestions of continuing with the existing framework of Cost Records & Cost Audit based on below premises: (1) Interest of the Society and Public in general : Even for those products for which the price is not regulated or which do not enjoy government subsidy, in country like India which has majority of the population below poverty level and which is constantly under pressure from increasing inflation, the price should be justifiable. An entity using its resources injudiciously and passing on the total cost of the resources to the ultimate consumer thus making the consumer bear the burden of its inefficiency, cannot be accepted particularly for a government which claims to be pro-poor and is keen on lifting the backward masses (or classes) from their present condition. In this context it is pertinent to mention that the argument put forward by the so-called champions of industry that in a open-market set-up the price is determined through competition and there is no need to regulate the price does not hold good, since there exists extensive dominance of the market and thus the price at which a product will sale, by the corporate through various ways of manipulation and which is evident from the fact that a bottle of drinking water (1 litre) is priced at Rs.16.00. Therefore, every industry need to justify their cost structure and the prices demanded by them. (2) Beneficial for proper Governance: As per International Good Practice Guidance (IGPG) of IFAC PAIB, definition of Governance is “the set of responsibilities and practices exercised by the board and executive management (“the governing body”) with the goal of (a) providing strategic direction, (b) ensuring that objectives are achieved, (c) ascertaining that risks are managed appropriately, and (d) verifying that the organization’s resources are used responsibly.” In today’s time, there is an urgent need of good governance even in case of small companies. Cost Audit Report (CAR) do not contain merely the cost details, but are full of information related to all aspects of business organization which, if harnesses properly can provide a comprehensive analysis about the company, the industry and the economy as a whole. The CAR serves as an effective tool of information in the hands of directors on the Board ensuring good corporate governance. The Companies Act, 2013 has put greater emphasis on the role of Independent Director in a Company. Such Independent Directors need more detailed information at the product cost and mergin level instead of global information of the company generally provided through the Financial Statement. This information only will help the Independent Directors make/suggest corrections in the policy and action of the company to make it competitive, profitable, and responsive to social justice. (3) With the advent of liberalization & WTO regime, consequential globalization has further enhanced the need for authentic data and we need to build up appropriate cost database to detect or fight all anti-dumping cases. This dumping of products, often below the cost price, if not properly countered may harm the indigenous industry. The practice of selling below cost to ward off competition is also to be scrutinized. Therefore, the Cost Compliance and Cost Audit Reports are required to ensure that the comprehensive authentic data is available in the format required. Further, in the present economic scenario, maintenance of cost records in a systematic manner is essential for all the companies. It is also considered necessary to provide requisite cost inputs to various regulators and government departments/bodies to protect the interest of consumers and investors and to protect the industry from unfair trade practices under WTO agreements. (4) Similarly, cases relating to transfer pricing or arm’s length price cannot be decided judiciously in the absence of reliable cost data. Further, proper allocation/apportionment of common costs to the enterprises operating in SEZ areas would also require adoption of well laid down costing principles. Such a reliable, standardized and industry wide database is possible only by way of statutory cost accounting and cost reporting. (5) Beneficial for Indirect Taxation: The way financial audit supports the revenue generation of Direct Taxes, in the same manner maintenance of Cost Records, Compliance report & Cost Audit are a very much beneficial tool in the hands of Indirect Tax officials. Supreme Court verdict in case of FIAT Motors is a fine example of the same. (6) Beneficial for Banks & Financial Institutions: They can go in Cost details of the company and its various products being manufactured before going for the financing decision. This will help in saving a lot of NPAs for the country. It is relevant to point out here that only recently the Sr. Deputy Governor of Reserve Bank of India stated that the banking system has written off over Rs. One Lakh Crores of bank loans 95% of which was to large industries. Even after such write off the Public Sector Banks alone have NPA of Rs. 2 trillion. (7) Beneficial for Domestic & Foreign Investors (FDI): They can have a detailed scrutiny of the records before investing in any of the company. (8) Beneficial for Tariff Commission: The Tariff Commission relies on the authenticity of the Cost Compliance and Cost Audit reports and makes use of these reports extensively in fixation of tariffs for the products covered under Cost Accounting Records Rules. (9) The reports have great potential in government procurements especially in case of non-competitive procurements. Cost Audit reports also helps government in making informed decisions on subsidies and incentives. (10) Curtailing the ever increasing Current Account Deficit (CAD): Even today, our lots of industries are dependent on imported inputs for their products and incurring a lot of Foreign Exchange. To control the haunting Current Account Deficit, there is a dire need to make sure that proper utilization of imported resources is being done. We could not deal with these issues even since 1965 but we started a new journey in 2011 in the right direction with the existing framework of CARRs but above said draft rules are again trying to take us back to 1960s. So, considering the detailed justification given above which also includes the recommendations of various Government representatives and Govt. authorized bodies, you are requested to not only incorporate our above mentioned suggestions in the said Draft Rules but also requested to recommend the same framework to Ministry of Finance also so that similar Cost Accounting framework can be established for the non-companies also and we can achieve the Original goal behind prescribing Sec. 209(1)(d) in 1965,
Posted on: Tue, 03 Dec 2013 10:49:00 +0000
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