Applicability of Cost Accounting Record Rules to Construction Industry :

There is still confusion in the industry regarding applicability of Companies (Cost Accounting) Records  Rules 2011 . To clear the confusion I would like to invite attention of all concerned to the clarification given by Sh.B.B.Goyal , Advisor Cost to the Secretary General, Construction Federation of India, 1103 ,Antriksh Bhawan, 22,KG Marg, New Delhi -110001 vide Letter No. 52/1/cab/2012 of Ministry of corporate affairs, Cost audit Branch dated 25^th may 2012. ( a copy of the letter reproduced below for your reference)

Salient  Features :

1.       All companies engaged in the construction and / or development (real Estate ) businesses who meet with the threshold limits laid down in Rule 3 of the Companies (Cost Accouning Recors) Rules ,2011 shall be required to maintain cost accounting records and file Compliance report with the Central government .

2.       Companies engaged in construction business as contractors or subcontractors wherein they are paid only the conversion charges are exempted from the applicability of companies (Cost accounting Records) Rules,2011

3.       These Rules do not apply to Non-Corporate entities (entities which are not registered under companies Act)

4.       No cost Audit applicable on the companies engaged in the construction and or development (Real Estate ) Business as on date.

Example of  Construction Industry Categories:

Construction involving civil and heavy engineering

Industrial and mining infrastructure

 Highways, roads, ports, railways, airports etc.

Rapid Mass Transport System,

Water Supply System,

Bulk Material Handling System,

River Linking Projects,

Sewerage System,

Solid Waste Management

Power systems

Irrigation and agriculture system

Telecommunication system

Real estate and Property development

Commercial real estate

Housing, schools, hospitals, Land and Township Infrastructure Development,

Construction projects involving specialty trades

Refineries, Chemical plants, Fertilizer plants including complex and heavy

process plant equipment

Oil and Gas projects including fabrication of Process Platforms, construction

of sub‐sea and other pipelines

Floating systems

Power projects

Nuclear Power Plant Construction

Transmission and distribution lines

Electrical Construction

Construction Project Models:

1                   Public Private Partnership (PPP) mode

BOO ‐ Build Own Operate

 BOLT ‐ Build Own Lease Transfer

 BOOST ‐ Build Own Operate Share Transfer

 BOT‐ Build, Operate and Transfer

 BOOT‐ Build, Own, Operate and Transfer

BOLT ‐ Build Own Lease Transfer

BLOT‐ Build, Lease, Operate and Transfer

DBFO ‐ Design Build Finance Operate

DBFOT‐ Design, Build, Finance, Operate and Transfer

EPC‐ Engineering, Procurement and Construction.

OMT ‐ Operate Maintain Transfer

2                   Real Estate Development model

3                   EPC  (Engineering, Procurement ,Construction)

      4.        Construction involving in-house fabrication or manufacturing
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                                                                              F.NO.52/1/CAB-2012

                                                                                Government of India

                                                                       Ministry of Corporate Affairs

                                                                                Cost Audit Branch

                                                                                                                                  

                                                                                                                              B-1 Wing,2^ND Floor,                                                                                                                                                              

                                                                                                                              Paryavaran Bhavan,                                                                                                                                                                      

                                                                                                                              CGO Complex,                                                                                                                                                                

                                                                                                                              New Delhi-110003 

                                                                                                                              Dated the 25^th May, 2012

To,

                The Secretary General,

                Construction Federation of India,

                1103, Antriksh Bhawan,

                22, K.G.Marg,

                New Delhi-110001

Subject: Exemption from applicability of Cost Accounting Records Rules to the Construction Industry.

Sir,

Please refer your letter dated 23^rd March, 2012 on the subject cited.CFI had earlier made a similar reference on 19^th December, 2011 and the matter was discussed in MCA on 11^th January, 2012 with the representatives of CFI and of few leading construction/development companies wherein it was observed that all such companies are already maintaining cost accounting records for their internal requirements. Cost Accounting Records Rules 2011 do not visualize companies to change their cost accounting system if already in- place; but they are required to comply with the Generally Accepted Cost Accounting Principles and Cost Accounting Standards issued by the institute of Cost Accountants of India, to the extent these are found to be relevant and applicable and also file compliance report with the Central Government. It was also observed that existence of structured & verified cost accounting records would enable the companies to fulfill regulatory requirements; comply with the Tax Accounting Standards; and assist is their tax assessments.

2.            Based on the discussions held, detailed clarifications were issued on 16^th January,2012 that       were duly acknowledged by the CFI vide their letter dated 27^th January,2012 and also conveyed to all their member companies for implementation.

3.            However, the matter has been once again examined in the Ministry and it has been decided that there appear no reasons for granting any special exemption to the construction (incl. development or real estate) industry from the applicability of the Companies (Cost Accounting Records) Rules 2011.Hence the decisions already conveyed earlier vide letter dated 16^th January, 2012 are being reiterated as under:

a)            All companies engaged in the construction and/or development (real estate) businesses who meet with the threshold limits laid down in Rule 3 of the Companies (Cost Accounting Records) Rules, 2011 shall be required to maintain cost accounting records and file compliance report with the Central Government in accordance with the provisions of these Rules. This includes companies undertaking construction jobs with the use of own materials(whether self manufactured/produced or procured from outside) and /or development of residential, commercial or industrial estates i.e. development of township, residential units, commercial complex, office blocks, industrial parks [including SEZ],etc. or construction of highways,rails,roads,bridges,industrial & no n-industrial under BOT/BOOT mode, or the projects undertaken as EPC contractor or the projects undertaken abroad by a company incorporated in India.

b)            As per MCA’s General Circular No.67/2011 dated 30^th November 2011, companies engaged in construction business as contractors or sub-contractors wherein they paid only the conversion charges are exempted from the applicability of Companies (Cost Accounting Records) Rules,2011.

c)            Companies (Cost Accounting Records) Rules, 2011 do not apply to such Joint Ventures that are non-corporate entities [i.e. not companies registered under the Companies Act] or to unlisted companies that are below the specified threshold limits or to a body corporate governed by any special Act.

d)            As on date, no cost audit is applicable on the companies engaged in the construction and/or development (real estate) business.Hence, these companies are only required to maintain cost accounting records and file compliance report with the Central Government that can be signed by their employee cost accountant as defined in Rule 2( c ) of the Companies (Cost Accounting Records) rules,2011.

                                                                                                                                                                               

CMA Krishna Dasan.A

Mob: 98711-28831

Happy Deepawali

Wish you and Your Family a Happy and Prosperous Deepawali





CMA Krishna Dasan .A
Prop. A.Krishna Dasan & Co       Partner : KP and Associates
         Cost Accountants                              Cost Accountants

PROCEDURE FOR APPOINTMENT OF COST AUDITOR

Procedure for Appointment of cost auditor.:

Step 1:Certificate from Cost Auditor

Obtain Certificate from Cost Auditor regarding compliance of section 224 (1- B) of the Companies Act, 1956.

Step 2: Board Resolution

Pass Board Resolution proposing appointment of cost auditor

Step 3:File Form 23C and Due date of filing Form 23C

The Company shall e-file its application with the  Central Government on www.mca.gov.in portal, in the prescribed Form 23C within ninety (90) days from the date of commencement of each financial year, along with the prescribed fee as per the Companies (Fees on Application) Rules, 1999 as amended from time to time and other documents as per existing practice i.e.

(i)            certified copy of the Board Resolution proposing appointment of cost auditor;

and

(ii)           copy of the certificate obtained from the cost auditor regarding compliance of section 224 (1- B) of the Companies Act, 1956

However where a company is covered under cost audit for the first time vide cost audit order dated 2^nd may 2011 , 3^rd may 2011 , 30^th june 2011 or 24^th jan 2012 , the period of 90 days shall be counted from the date of concerned order. Every company has to follow the procedure prescribed vide MCA Circular No.15/2011 dated April 11 , 2011.

Step 4 : Approval by Central Govt.

Prior approval would be deemed to have been granted if the Central Government does not raise any query within 30 days of filing of Form 23C.

In case the Central Government raises any query within the said period of 30 days, the company would be required to clarify the issues and re-submit the Form 23C. The period of 30 days, in this case, would run from the date of resubmission of Form 23C.

Step 5  Formal letter of appointment to the Cost Auditor

After obtaining approval of the Central Government (deemed or otherwise),the Company will be required to issue a formal letter of appointment to the cost auditor.

Step 6 File Form 23D by Cost Auditor

The Cost Auditor is required to inform the Central Government within thrity days of receipt of formal letter of appointment from the Company. Such intimation is required to be done in prescribed e-Form 23 D along with a copy of such appointment.

Other Points

(     a)  Competent Authority :

As per provisions of section 233B(2), the Board of Directors of a Company can appoint a cost auditor after obtaining prior approval of the Central Government. Under the revised procedure, the first point of reference will be the Audit Committee to ensure that the cost auditor is free from any disqualification as specified under section 233B (5) read with section 224 and sub-section (3) or sub-section (4) of section 226 of the Companies Act, 1956. The Audit Committee should also ensure that the cost auditor is independent and is at arm's length relationship with the company. After ascertaining the eligibility, the Audit Committee will recommend to the Board of Directors for appointment of the Cost Auditor.

In those companies where constitution of an Audit Committee is not required by law, the functions of the "Audit Committee" as per the procedure will be discharged by the "Board of Directors".

(     b)  Disclosure to be made by Company in Annual Report:

The Company is required to disclose full particulars of the cost auditor along with the due date and actual date of filing of the Cost Audit Report by the cost auditor, in its Annual Report for each relevant financial year. Since the notification has made effective from April 1, 2011, companies under cost audit are required to furnish the details in its Annual Report from the financial year 2010-11.

Since the cost audit report of a particular financial year may not have been submitted before publication of the Annual Report, relevant details of due and actual date of filing for the last financial year and the due date of filing for the current year may be published in the Annual Report.

© Additional Fee for Late filing of Form 23C

Till 6^th August 2012 , there were no penal provisions in the companies ( Fees on Applications) Rules, 1999 for delay in filing of Forms but as per MCA  notification dated 7^th August 2012 , the penal provisions have been made applicable which are given below.

Period of Delay                                Fee Payable with the Application

Up to 30 days	Two times of normal fee
More than 30 days and up to 60 days	Four times of normal fee
More than 60 days and up to 90 days	Six times of normal fee
More than 90 days	Nine times of normal fee

(d) Normal Fee as per the Companies (Fees on applications ) Rules , 1999 :

Application made by  :                                                             Amount of Fees to be paid(Rs.)

1              A Company having an Authorised Share Capital of

(a)   Less than Rs.25 Lakh                                                                            500.00

(b)   Rs.25 Lakh  or more but less than Rs.5 Cr                                            1000.00

(c)   Rs. 5 Cr or More                                                                                   2000.00

     2.         A company limited by Guarantee but not having a share capital                   500.00

     3.         By an Association or proposed company for issue of licence

     under section 25 of the Act                                                                           500.00

     4.      By a company having a valid licence issued under section 25 of the Act          500.00

     5.      By a Foreign Company                                                                                   1000.00

PENAL PROVISIONS FOR NON-COMPLIANCE:

NON-COMPLIANCE BY COMPANY

If a Company contravenes any provision of this circular, the company and every officer thereof who is in default, including the persons referred to in sub-section (6) of Section 209 of the Act shall be punishable as provided under sub-section (2) of Section642 read with sub-section (5) and (7) of Section 209 and sub-section (11) of Section 233B of Companies Act, 1956.

Relevant provisions of Section 209 of the Companies Act, 1956 are as follows:

Sub-section (5) of Section 209 provides that if any of the persons referred to in sub-section (6) fails to take all reasonable steps to secure compliance by the company with the requirements of this section, or has by his own wilful act been the cause of any default by the company there under, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both:

Provided that in any proceedings against a person in respect of an offence under this section consisting of a failure to take reasonable steps to secure compliance by the company with the requirements of this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeking that those requirements werecomplied with and was in a position to discharge that duty:

Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.

Sub-section (6) of Section 209 provides that the persons referred to in sub-section (5) are the following, namely:—

(a) where the company has a managing director or manager, such managing director or manager and all officers and other employees of the company; and

(d) where the company has neither a managing director nor manager, every director of the company;

Sub-section (7) of Section 209 provides that  if any person, not being a person referred to in sub-section (6), having been charged by the managing director, manager or Board of directors, as the case may be, with the duty of seeing that the requirements of this section are complied with makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which my extend to six months, or with fine which may extend to ten thousand rupees, or with both.

Relevant provision of  Section 642 of the Companies Act 1956 is as under:

Sub-section (2) of Section 642 provides that any rule made under sub-section (1) may provide that a contravention thereof shall be punishable with fine which may extend to five thousand rupees and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first during which such contravention continues.

 Non compliance by Cost Auditor:

If default ismade by the cost auditor in complying with the aforesaid provisions, he shall be punishable with fine, which may extend to five thousand ruppees

RESOLUTION

DRAFT BOARD RESOLUTION - FOR APPOINTMENT OF COST AUDITOR

M/s ........................................................  held at the office of the Company on -------------------.

Secretary tabled the MCA order F.No.52/26/CAB -2010 Dt. 24-01-2012 ordering the Cost Audit of .................................................................................. for the year 2012-13.

The Chairman informed the Board that A.Krishna Dasan & Co , Cost Accountants  have given their  consent to act as cost auditor(s) and certificate for their independence and Arm’s Length relationship with the company and laid on the table the certificates received from A.Krishna Dasan & Co  , Cost Accountants . 

It was accordingly

RESOLVED that, pursuant to section 233B of The Companies Act, 1956 and subject to the approval of the Central Government A.Krishna Dasan & Co , Cost Accountants be and hereby appointed as the cost auditor(s) of the company to conduct audit of cost accounting records maintained by the Company for product(s)/Services covered under MCA Cost Audit Order(s) for the year ending on 31-03-2013  at a remuneration of Rs. ------------------ plus service tax and out-of pocket expenses.

FURTHER RESOLVED that the Secretary/Director of the company be and is hereby directed to submit the necessary application in Form 23 C to the Central Government and to do all such acts as may be necessary.

CMA Krishna Dasan.A
Mob: 98711-28831
E Mail: aknair2002@cmaglobal.net.in