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Applicability of Companies Cost Accounting (Record Rules) 2011, for filing compliance Report in case of Company engaged in the construction business as a Contractor or Sub-Contractor.

The Notifications has been issued regarding Companies Cost Accounting (Record Rules) 2011, by the Cost Audit Branch of Ministry of Corporate Affairs, Govt of India, Various Issues and Questions Put up by the Industries, Companies and many Professionals for applicability of Companies Cost Accounting Record Rules, 2011 in their respective organisations.

The same situation of confusion arises for the companies engaged in the construction business as a contractor or sub-contractor, so this article consisting various questions may give a confusion free picture of applicability of Companies Cost Accounting (Record Rules) 2011, in the above case.

Q1) Is the Companies Cost Accounting (Record Rules) 2011, shall be applicable in all the companies engaged as a contractor or Sub-contractor activity?

R1) If any Company engaged as a contractor or sub-contractor’s activity and fulfilled the limit & conditions specified in Rule 3 of Cost Accounting (Record Rules) 2011, for Turnover, Net worth or the listing of their debt or equity in any stock exchange or in the process of listing as specified in the notification issued by the cost audit branch of Ministry of Corporate Affairs, Govt. of India dated 3rd June, 2011, the Companies Cost Accounting (Record Rules) 2011, shall be applicable in all such companies provided that the companies are not paid for job charges or conversion charges only.

To understand the applicability, it is important to see that whether the company is using its own material for the project undertaken or not.

If the company is using own material for executing the project the activity shall be considered as manufacturing activity and same company has to file a Compliance Report under the Companies Cost Accounting (Record Rules) 2011.

Q2) what is rule 3 of Companies Cost Accounting (Record Rules) 2011.

R2) Rule 3 of Companies Cost Accounting (Record Rules) 2011 specified the conditions for applicability of the compliance report as follows.

The company should be engaged in the production, processing, manufacturing or mining activities, whose

· Aggregate value of net worth exceeds rupees five crores as on the last date of immediately preceding financial year.

· Aggregate value of turnover exceeds rupees twenty crores as on the last date of immediately preceding financial year from sale or supply of all the products.

· The company’s equity or debt securities are listed or are in the process of listing on any stock exchange, it may be in India or outside India.

Q3) what are the conditions, where above rule does not apply for the purpose of compliance report under Companies Cost Accounting (Record Rules) 2011, In case of companies engaged as a contractor or Sub-contractor activity.

R3) Following are the conditions where a company does not cover under Companies Cost Accounting (Record Rules) 2011.

· If the company does not fulfill the criteria mentioned in the Rule 3 of Companies Cost Accounting (Record Rules) 2011.

· Company not registered under the companies Act.

· Anybody corporate governed under any special Act.

· If the company follows the following specific cost accounting record rules.

1. Cost Accounting Records (Bulk Drugs) Rules, 1974.

2. Cost Accounting Records (Formulations) Rules, 1988.

3. Cost Accounting Records (Fertilizers) Rules, 1993.

4. Cost Accounting Records (Sugar) Rules, 1997.

5. Cost Accounting Records (Industrial Alcohol) Rules, 1997.

6. Cost Accounting Records (Electricity Industry) Rules, 2001.

7. Cost Accounting Records (Petroleum Industry) Rules, 2002.

8. Cost Accounting Records (Telecommunications) Rules, 2002.

Q4) what was the reasons that specific cost accounting record rules have been issued for above industries? 

R4) the above industries are very important for economic point of views and they have their own regularity body and such industries operate under regulation of their respective regularity body.

So there is possibility that the regularity body may have their own rules & procedure in some cases for preparing the cost records.

With the understanding of above, industry specific cost accounting record rules have been issued for the above industries.

              Industry wise regularity body are as follow

SL No.

           INDUSTRY

                          REGULARITY BODY

1

Pharmaceutical

Central Drug Standard and Control Org. (CDSCO)

National Pharmaceutical Pricing Authority. (NPPA)

2

Fertilizer

International Fertilizer Association. (IFA)

3

Sugar

Department of Agriculture Sugar Regularity Administration.

4

Electrical

Central Electricity Regulation Commission.

State Electricity Regulation Commission.

5

Petroleum

Petroleum Federation of India.

Petroleum & Natural Gas Regulatory Board.

6

Telecommunication

Telecom Regulatory Authority of India. (TRAI)

Q5) is there any explanation of own material?

 R5) Own Material Includes:

· Material used in the Project which is self Manufactured/Produced by the company working as a contractor or sub-contractor.

· Material used in the Project which is either purchased or received from outside and owned by the company working as a contractor or sub-contractor.

Q6) what would happen in case if a company X is giving a contract to another company Y for the conversion of material into final product and also providing material to company Y ?

R6) In this case company Y is not using its own material but it is provided by the company X and company Y is paid only for conversion charges, so company Y need not to file a compliance report under Companies Cost Accounting (Record Rules) 2011, But Company X has to file the compliance Report.

Q7) what would be the applicability of Companies Cost Accounting (Record Rules) 2011, when a company is using its own brand name and selling it to the ultimate consumer?

R7) Irrespective of selling to the ultimate consumer, Companies cost accounting record rules 2011, shall be applicable if any company is using its own brand name with any product received from the manufacturer and incurring all the expenses related to the brand name because it indicates that the company is introducing a different or unique product and doing value addition in the product.

Q8) is it possible that the both the company, the company who is giving the project or the company who has undertaken the project have to file the compliance report under Companies Cost Accounting (Record Rules) 2011?

R8) Yes, if a company X manufacturing the goods by using its own material and selling to another company Y and company Y using its own brand name and selling it to the ultimate consumer , in that case Companies Cost Accounting record rules,2011 will attract both the companies X & Y and both have to file the compliance report.

Q9) what would be the applicability of Companies Cost Accounting (Record Rules) 2011, if company Y purchased material in behalf of company X and used in the project undertaken and company X pays the conversion charges and reimbursed for material as well to company Y?

R9) Companies Cost Accounting Record Rules, 2011 shall be applicable in company X but not in company Y because company Y is not executing the project by using its own material, but only for conversion charges or job work charges.

Q10) what would be the applicability of Companies Cost Accounting (Record Rules) 2011, if company Y working as a contractor on the project of company X and company X providing material for execution of project to company Y and company Y is paying off for such material to company X?

R10) In this case company X providing the material for execution of project to company Y and company Y has reimbursed for such material to company X and bearing the cost of material as well so it clearly shows that company Y using its own material in the project undertaken from company X.

So company Y has to file the compliance report under Companies Cost Accounting (Record Rules) 2011.

Q11) can we identify that the contractor or sub-contractor is using its own material in the project undertaken by vouching the invoices only, raised by the contractor or sub-contractor for their work done?

R11) Yes, we can identify by looking into the tax treatment in the invoice raised by the contractor or sub-contractor.

Tax treatments are as follow

1) Vat & Service tax – if any contractor or sub-contractor working on the project undertaken with their own material, the contractor or sub-contractor will charge the service tax for his services and vat for the material used in the project in their invoice for work done.

2) Work Contract Tax - if any contractor or sub-contractor working on the project undertaken with their own material and the share of Services provided & own material used in the project is not easily identifiable, in this case a specified percentage of rate of duty charged in the invoice called work contract tax.

Q12) what does construction business includes?

· Is it applicable to construction contracts only?

R12) Construction Business has a wider meaning under companies cost accounting record rules, 2011 which includes a contract of development of residential, commercial or industrial estates i.e. development of township, residential units, commercial complex, office blocks, industrial parks including SEZ or etc. it further includes the contract of construction of highways, rails, roads, bridges, industrial & non industrial structure or other infrastructure facilities.

· The MCA General Circular No. 67/2011 dated 30th November 2011 was clarified that the Companies Cost Accounting (Record Rules) 2011, shall be applicable to all companies engaged as a contractor or sub-contractor not limited to construction contract, provided that such contractor or sub-contractor are not paid for job charges or conversion charges only.

Q13) is there any other criteria where company engaged in the construction business covers under Companies Cost Accounting (Record Rules) 2011?

R13)Yes, followings are the eligibility criteria where a company covers under Companies Cost Accounting (Record Rules) 2011.

· Any contractor or sub-contractor executing the project under BOT/BOOT mode.

· Any contractor or sub-contractor undertaken the project as an EPC contractor.

·  Or project undertaken abroad by a company incorporated in India.

Q14) what is project under BOT/BOOT?

R14) BOT/BOOT stands for ‘Built Operate Transfer’/’Built Own Operate Transfer’ both have same meaning but name varies with the countries, in some countries it is called as BOT and somewhere it is BOOT.

In case of BOOT, Contractor holds the ownership and can modify the Project undertaken for economic and other benefit.

In such projects the contractor or sub-contractor used all kind of his own resources and execute the project, gives a final shape to the project (Built), worked as a care taker, operate for a specified period as per the agreement with another party and recover their cost and margin from the revenue generated from that project and transfer it after that specified period.

Usually contractors and sub-contractors are taking such projects from Government (State, Central or any Statutory/Govt body or Authorities).

Example of such projects: Bridge, Toll, Multilevel Parking etc.

Q15) what is project undertaken as an EPC contractor?

R15)  EPC stands for Engineering, Procurement and Construction.

It is a common form of contracting within the construction industry. Under an EPC contract, the contractor will design the installation, procure the necessary materials and construct it, either through own labour or by subcontracting part of the work. The contractor carries the project risk and return as well for a fixed price.




Category Others, Other Articles by - Manish Kandpal 



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