Impact of Cost Accounting Rules on TP Compliance
Mr. Simachal Mohanty, Global Head - Direct Tax, Dr. Reddy's Laboratories Ltd
An interesting proverb says "You cannot change your luck and neighbour, but can amend your ways to meet them".
We all thought laws about Cost accounting compliance and reporting are neighbouring provisions to the direct tax laws. However, this time we need to welcome this neighbour, at or against our will, since it has already set in to the house of direct tax.
Ministry of Corporate Affairs published a notification dated 3 rd June 2011 , notified The Companies (Cost Audit Report) Rules 2011. All we thought that it is another piece of legislation relating to Cost Accounting, we all took a lazy view on it legitimately. However, these rules have a lot to do with our transfer pricing law – let's analyze.
According to Sec. 209 (1)(d) of Companies Act, 1956, a company engaged in production, processing, manufacturing or mining activities must keep cost accounting records relating to utilisation of material or labor other items of costs as may be prescribed by Central Govt subject to specified criteria.
233B (1) of Companies Act, 1956 states that cost audit and reporting shall be conducted in specified manner in order to ensure compliance of above provisions of Sec.209, Ministry of Corporate Affairs published a notification dated 3 rd June 2011, notified The Companies (Cost Audit Report) Rules 2011 which, inter alia, specifies the form of cost audit report and the allied rules.
Every company covered under the above category, shall keep maintain cost details, statements, schedules for each unit and each product or activity comprises in each product, duly authenticated by atleast two Directors of the company and the cost auditor.
Further, this Rule requires a cost auditor, who issues a cost audit report after 1 st April 2012, irrespective of the financial year of the company which it relates to, shall be in form proscribed under these rules.
The format of the cost audit report has 10 annexure, out of which one is of utmost importance both to the assessees and to the transfer pricing auditors who issues the report in form 3CEB. This annexure is referred as "RELATED PARTY TRANSACTIONS (for the company as a whole)".
Annexure contains following details which must be reported as integral part of cost accounting report issued by the cost auditor, in a horizontal manner.
RELATED PARTY TRANSACTIONS (for the company as a whole)
Name and address of the Related Party
Name of the Product
Nature of Transactions (Sales, Purchase etc).
Basis adopted to determine the Normal Price
1. Details should be furnished for each sale/purchase separately.
2. Details of Related Party transactions without indicating the Normal Price and the basis thereof shall be considered as incomplete information.
Compliance to the above requirement would require each of us to undertake a full fledged transfer pricing documentation in a manner it is done for Sec.92 of Income Tax Act. Interestingly, the terminologies such as "Related Party", "Transfer Price", "Normal Price" are not defined under this Rule. But practically we need to take cognizance of Chapter X of Income Tax Act dealing with the Transfer Pricing provisions.
When it is clear that the related parties will be largely construed as "associated enterprises" as per Sec.92A,
and the international transactions with such enterprises will be subject to cost audit reporting requirements, applicability of cost audit reporting requirements to specified domestic transactions including transactions with Special units (80-IA, SEZ units) and transactions with persons covered under Sec 40(A)(2)(b) need to be deliberated and examined.
Next immediate question that comes to us is when this compliance required? All we thought is that as per Income Tax provisions, transfer pricing report in form 3CEB must be issued before 30 th Nov, 2012 and accordingly prioritised our work schedule with other assignments.
But now we need to take immediate cognizance of the above cost audit reporting requirements since this report needs to be uploaded to Ministry of Corporate Affairs (Cost audit branch) within 180 days from the close of the company's financial year to which the report relates. So, in most of cases, this cost audit report will have to be uploaded by 30 th Sept 2012, which requires our immediate attention.
Data reported in Form no 3CEB and in the cost audit report need to match in all aspects with regard to transactions subject to transfer pricing regulations.
Hence we need to pre-pone finalisation 3CEB details immediately without waiting till 30 th Nov, since these details will be direct input for the cost audit report to be uploaded to MCA site before 30 th Sept 2012.
Courtesy : taxsutra