CMA Navneet Kumar Jain

Show Cause Notices (SCNs) issued by MCA for non compliance with the Cost Audit Provisions: Is it a beginning to ensure collection of authenticated data at HSN code level for GST

Cost Audit mechanism was instituted by the government of India to ensure that companies reap the benefits of critical examination of complex costing data and improve upon the efficiency of the organisation by weeding out the non profitable ventures or activities which simply add to cost and do not add value to the products or the brand building of the products.

It is irony that in India, cost audit is considered as an activity which consumes too much resources of the organization without any visible output/benefit for the organization.  MCA kept on bringing more and more companies under cost audit till 2013-14 considering its utility to various government user departments and after that reduced the scope of cost audit to some extent for some unknown reasons. However now, MCA is pushing for compliances under cost audit in a big way.

The provisions regarding cost audit were created for compliance by the organizations/professionals but owing to the nil enforcement by MCA till few years back, the companies were taking a very lenient view on the compliance with regard to the cost audit. Many companies which were covered under cost audit, did not comply with the cost audit orders/provisions and were never questioned. But with change in the work force at MCA/Cost Audit Branch, the compliance regime is witnessing a remarkable change in the approach of the regulators.

With likely roll out of GST, Cost Audit Reports are going to play a major role in GST regime because of its old and close connection with the profitibalities (worked out using Sales, Raw Material consumption and other costs)  at SKU level, plant level, state level and company level. (May have some thing common under anti-profiteering clause of GST).

The Cost Audit Branch, Ministry of Corporate Affairs  seems to have taken a lead in ensuring cost audit compliance mechanism which will enable the different wings of the government to have a reliable data base at the HSN code level for GST decision making body.

Moving  a step ahead in tune with current business scenario and with the impending need for the useful data for government decision making and to implement the law regarding cost audit fully, the cost audit branch has started issuing notices to the defaulter companies which have not either appointed cost auditors or did not file the cost audit reports after appointment of cost auditors.

It seems very easy to avoid compliance with the cost records maintenance/cost audit mechanism but once caught, the companies compliance cost increases many-fold because of the penalties and prosecution proceedings. The companies have to go for compounding also which entails a good amount of money.  So the so-called cost saving done by some persons by resorting to non-compliance with cost audit mechanism  ultimately leads the directors to face summons etc.. It has already happened in many cases and to add to the list are the show cause notices issued by MCA on 27th Mar 2017, many other SCNs seem to be in pipeline. The SCNs give a reference to various provisions of the Companies Act 2013 starting with Section 20, section 147,  Section 148, section 403 and section 441.

The notices have been served electronically as envisaged in the Section 20 of the Companies Act 2013. In section 148.

Section 147 (1) prescribes the quantum of punishment which will vary from Rs Twenty Five Thousands to Rs Five Lacs for the company and Rs Ten Thousands to Rs One Lac for each officer in default  alongwith imprisonment.

Section 147. (1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees, or with both.

(2) If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees:

Sub-section (8) of Section 148 of the Act states

“If any default is made in complying with the provisions of this section,

(a)   the company and every officer of the company who is in default shall be punishable in the manner as provided in sub-section (1) of section 147;

(b)   the cost auditor of the company who is in default shall be punishable in the manner as provided in sub-sections (2) to (4) of section 147.”

Going by the above provisions read with the Show Cause Notices, one can infer that MCA is determined to ensure compliance.

Recently, one company issued an advertisement calling quotations for conducting seven years of cost audit at a stretch, it shows that even after passing few year with non compliance, sword will be hanging on the heads of the officers in default of the company and they may have to pay the price for it.

Way forward to handle SCNs

  1. Submission of reply to Cost Audit Branch: The companies must send replies to the cost audit branch failing which prosecution may get initiated against company and all of the officers in default.
  2. If the offence requires compounding, immediately apply for compounding to Registrar. One can observe that specific reference to section 441 has been made for compounding purposes in the show cause notices

The show cause notices by Cost Audit branch is nothing but an awakening call to get serious about cost audit in the light of GST regime.

Heavier punishment in case of repeated default:

Whenever a company commits repeated default, the consequences are worth noting which are given below:

Punishment in case of repeated default (Sec. 451) Same offence is committed for the second or subsequent occasions within 3 years, then – twice the amount of fine for such offence in addition to any imprisonment provided for that offence.

It means that in case the company does not appoint cost auditor for two consecutive years, it may be considered as repeated default for the second year in question.

Example of the Show cause notices issued are given below for reference

Show Cause Notice under Section 148 (8) of the Companies Act, 2013 (Act)

ABC LIMITED

WHEREAS, it has been found from our records that your company falls under the ambit of Cost Audit but has failed to submit the Cost Audit Report for the Financial Year 2014-15 within the statutory time limit prescribed by Sec. 148(6) of the Act and Rule 6 of Companies (Cost Records and Audit) Rules, 2014 (Rules) read with first proviso to Sec. 403(1) of the Act. Accordingly, sub-section (6) of Section 148 of the Act has been contravened.

2. WHEREAS, as per sub-section (8) of Section 148 of the Act,

“If any default is made in complying with the provisions of this section,

(a)   the company and every officer of the company who is in default shall be punishable in the manner as provided in sub-section (1) of section 147;

(b)   the cost auditor of the company who is in default shall be punishable in the manner as provided in sub-sections (2) to (4) of section 147.”

3. Now, therefore the addressees, being the Company and its officers, are hereby called upon to show cause as to why action shall not been taken to initiate prosecution under clause (a) of sub-section (8) of Section 148 read with section 147(1) of the Act for contravention of section 148(6) of the Act read with sub-rule (5) and (6) of Rule 6 of the Rules.

4. Please take notice that if no reply is received or cause shown within 21 days from the date of issue of this notice, necessary prosecution against the company and all its officers who are in default shall be launched in the Court.

5. Your attention is invited to the provisions of Section 441 of the Act for compounding of the said offence.

6. In term of the provision of Section 20 of the Act, the notice is hereby being served on the company and all its officers who are in default at the registered office of the company by electronic mode on the email id provided by the company on MCA Portal.

7. Company is requested to bring this notice in the knowledge of its officers in default, immediately upon its receipt.

GST is aligned with the cost audit and only smooth implementation of cost audit provisions and expansion of cost audit regime can help the companies to demand for the due share under GST in the form of reduced rates and the government based on the authentic data can take calls under GST regime with regard to anti-profiteering, valuations etc.

In case of any further clarifications, please feel free to write us at navneetic@yahoo.com

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