Introduction: Understanding Cost Records Under the Companies Act, 2013

In the dynamic business environment of India, compliance with statutory requirements has become more than a legal obligation—it’s a strategic necessity. One of the most critical compliance components for companies operating in specified industries is the maintenance of cost records as mandated under the Companies Act, 2013. These records go far beyond traditional accounting. They provide granular details about the cost of production, processing, manufacturing, and service delivery, making them essential for cost control, operational efficiency, and regulatory scrutiny.

Cost records are defined as detailed documents that reflect the cost elements of goods or services produced by a company. These include raw material costs, overheads, salaries, depreciation, administrative expenses, and other financial metrics required for calculating the cost of production and services. Maintaining these records allows companies to understand internal cost dynamics and demonstrate pricing transparency to regulatory bodies.

To standardize this process and ensure regulatory compliance, the Ministry of Corporate Affairs (MCA) issued the Companies (Cost Records and Audit) Rules, 2014 under Section 148 of the Companies Act. These rules make it mandatory for companies in specific sectors to maintain cost records and, where applicable, have them audited by a certified cost accountant.

Focus on Rule 3: Industries That Must Maintain Cost Records

A crucial section of these rules is Rule 3, which outlines the industries and sectors obligated to maintain cost records. This rule categorizes companies into regulated and non-regulated sectors and applies threshold-based criteria such as turnover, listing status, and net worth to determine compliance applicability.

The blog you're reading is based on the latest amended version of the rules, updated up to July 15, 2016, ensuring you receive the most accurate and legally relevant information.

Maintaining proper cost records is not merely a best practice—it is a mandatory requirement. Non-compliance can lead to severe penalties, legal consequences, and reputational damage. Moreover, cost records are integral to cost audit, a specialized review that ensures financial discipline, eliminates inefficiencies, and strengthens corporate governance.

Let’s now delve into the legal landscape of Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 to understand which companies are covered, the thresholds for applicability, and how regulated and non-regulated sectors are defined.

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Legal Background: What Does Rule 3 of Cost Audit Rules Say?

The Companies (Cost Records and Audit) Rules, 2014 were notified by the MCA to enforce Section 148 of the Companies Act, 2013. Rule 3 of these rules is the cornerstone of compliance, detailing which companies are required to maintain cost records and, in certain cases, get them audited by a cost accountant.

2.1 Applicability of Rule 3

Rule 3 states that every company, including a foreign company engaged in production of goods or provision of services listed in the annexure of the rule, shall maintain cost records if their turnover from all products and services during the immediately preceding financial year is ₹35 crore or more.

Additionally, companies exceeding ₹100 crore in turnover or listed on stock exchanges may also be required to undergo a cost audit, depending on the sector they operate in.

Rule 3 divides the scope of compliance into two broad industry categories:

• Regulated Sectors

• Non-Regulated Sectors

Let’s understand the significance of both classifications.

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2.2 Regulated Sectors (Rule 3(1)(A))

Regulated sectors refer to those industries that are governed or influenced by independent regulatory authorities or central government ministries. These sectors usually deal with essential commodities or services where pricing and cost transparency are critical for public welfare.

Industries under regulated sectors include:

• Telecommunication services

• Electricity generation, transmission, and distribution

• Petroleum products and natural gas

• Drugs and pharmaceuticals

• Fertilizers

• Sugar

• Railways

Cost Audit Applicability for Regulated Sectors:

• Companies operating in regulated sectors must maintain cost records if turnover is ₹35 crore or more.

• They are also mandatorily subject to cost audit if:

  • Their overall annual turnover exceeds ₹50 crore, and

  • The turnover from the regulated product or service exceeds ₹25 crore.

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2.3 Non-Regulated Sectors (Rule 3(1)(B))

Non-regulated sectors include a wider array of manufacturing and service industries that are not directly controlled by statutory regulators but still play a vital role in the economy. These industries may not have fixed pricing structures but are subject to economic trends and consumer demands.

Examples of non-regulated industries include:

• Cement

• Steel

• Textiles

• Paper

• Paints

• Machinery

• Real estate

• Hospitality

• IT-enabled services

• Health and education services

Cost Audit Applicability for Non-Regulated Sectors:

• Companies in these sectors must maintain cost records if turnover is ₹35 crore or more.

• Cost audit becomes mandatory if:

  • The total turnover exceeds ₹100 crore, and

  • The turnover from the non-regulated goods/services exceeds ₹35 crore.

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2.4 Key Applicability Criteria

Rule 3 lays down several threshold-based criteria for determining whether a company needs to maintain cost records and conduct an audit:

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Conclusion of Legal Overview

Rule 3 is a powerful regulation that aims to bring cost transparency, efficiency, and regulatory oversight across key Indian industries. Understanding the distinction between regulated and non-regulated sectors, and checking applicability thresholds, is crucial for every business entity in India.

Whether your company is in power generation, cement manufacturing, or IT services, if your turnover crosses the prescribed limits, compliance with cost record maintenance and cost audit becomes legally mandatory.

In the upcoming sections, we will explore the complete list of industries under each category and offer a practical compliance checklist for 2025.

Regulated Sectors: Industries That Must Maintain Cost Records

Under the Companies (Cost Records and Audit) Rules, 2014, Rule 3 mandates that companies engaged in specific regulated sectors must maintain detailed cost records and, where applicable, undergo a cost audit. These regulated sectors are strategically important to the economy and are monitored by government regulatory authorities. Cost compliance in these sectors ensures transparency, pricing control, and efficient resource allocation. Here's a breakdown of each regulated sector:

3.1 Electricity

Companies engaged in the generation, transmission, or distribution of electricity fall under the purview of cost record maintenance. These businesses must document expenses like fuel costs, power purchase charges, equipment maintenance, and infrastructure investment. The Central Electricity Authority (CEA) and Central Electricity Regulatory Commission (CERC) oversee compliance.

3.2 Petroleum Products & Natural Gas

This includes companies engaged in refining, distribution, or marketing of petroleum products and natural gas. Due to government price control and high public impact, maintaining accurate cost records is critical for subsidy evaluation, fiscal policy, and profit margin assessment.

3.3 Telecommunication Services

Telecom companies offering mobile, broadband, and other communication services must maintain cost records covering operational costs, spectrum license fees, infrastructure expenditure, and call/data cost allocation. The Telecom Regulatory Authority of India (TRAI) requires these records for tariff regulations.

3.4 Drugs & Pharmaceuticals

Firms involved in the manufacturing of medicines, vaccines, and active pharmaceutical ingredients (APIs) are required to maintain cost records for production, packaging, R&D, and compliance. This helps regulators monitor pricing and prevents excessive profiteering in the healthcare sector.

3.5 Fertilizers

Manufacturers of urea, DAP, and other fertilizers need to maintain cost data that captures raw material costs, energy consumption, and production overheads. This assists the government in subsidy calculation and controlling agricultural input costs.

3.6 Sugar

Sugar mills involved in processing sugarcane and producing sugar must maintain records of crushing, production cost, bagasse usage, labor, and export subsidies. These records are crucial in determining Minimum Selling Price (MSP) and ensuring farmer payouts.

3.7 Railways

Companies operating under Indian Railways PPPs or providing transport/logistics services linked to rail infrastructure are expected to maintain cost records related to freight, passenger operations, rolling stock maintenance, and fuel usage.

✅ Compliance Tip:

All companies under these regulated sectors must:

• Maintain cost records in accordance with CRA-1 format.

• Appoint a Cost Auditor by filing CRA-2 with the MCA.

• Submit the cost audit report in CRA-4 within 180 days of the financial year end.

Failure to comply can result in penalties and disqualification of company officers.

Non-Regulated Sectors: Industries That Must Maintain Cost Records

Even though companies in these industries are not overseen by statutory regulators like CERC or TRAI, they are still required to maintain cost records if they meet the thresholds defined under Rule 3 (e.g., turnover of Rs. 35 crore or more). These industries significantly impact manufacturing GDP, exports, and employment.

Here is the complete list of non-regulated sectors:

Sl. No.	Industry	Description
4.1	Cement	Cost records must track raw materials, kiln operations, power usage, and logistics.
4.2	Steel	Tracks smelting, conversion costs, and raw material (iron ore, coal) expenses.
4.3	Aluminium	Involves high energy costs, bauxite sourcing, and refining data.
4.4	Paper	Maintains cost records for pulping, paper machines, and chemicals.
4.5	Tyres & Tubes	Rubber sourcing, vulcanization, and production overheads are included.
4.6	Glass	Covers melting, forming, annealing, and packaging costs.
4.7	Paints & Varnishes	Cost records for pigments, solvents, and production processes.
4.8	Textiles	Tracks ginning, spinning, weaving, dyeing, and export data.
4.9	Edible Oil	Captures costs in refining, packaging, and oilseed procurement.
4.10	Industrial Gases	Production of oxygen, nitrogen, and specialty gases requires detailed records.
4.11	Machinery and Mechanical Appliances	Covers casting, machining, assembly, and labor data.
4.12	Electricals and Electronic Goods	Tracks PCB manufacturing, assembly, and imported components.
4.13	Construction and Real Estate	Requires job costing, material usage, and subcontractor expenses.
4.14	Health Services	Hospitals must maintain cost per bed, treatment, and diagnostics.
4.15	Education Services	Educational institutes track cost per student, faculty, and facilities.
4.16	IT-enabled Services	BPOs, KPOs must document employee cost, server infrastructure, and licensing.
4.17	Hospitality (Hotels and Restaurants)	Tracks food cost, occupancy, labor, and utility expenses.

These companies must maintain cost records in CRA-1 format and appoint a cost auditor under Rule 6 if they meet audit applicability limits (i.e., turnover over Rs. 100 crore and product-specific turnover over Rs. 35 crore).

Conclusion: Whether your company operates in the regulated electricity sector or the non-regulated textile industry, compliance with Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 is essential. Accurate cost records not only prevent regulatory penalties but also help improve pricing strategies, production efficiency, and investor confidence.

Stay compliant. File CRA-2 on time. Leverage expert help from SSCOIndia.com to handle cost record compliance and cost audit filings effortlessly.

Exemptions and Threshold Limits

Under the Companies (Cost Records and Audit) Rules, 2014, not all companies are obligated to maintain cost records. Rule 3 specifically outlines the exemptions and threshold limits that determine which entities fall outside the purview of cost compliance. This clarity ensures that only companies meeting certain financial or sector-specific benchmarks are required to undertake the often-complex process of cost record maintenance and cost audit.

Who is Exempt?

Companies are exempt from maintaining cost records if they do not meet the prescribed threshold limits related to turnover, net worth, or listing status. As per the latest amendments up to July 15, 2016, the following entities are exempt:

• Companies whose overall annual turnover from all products and services is less than INR 35 crore.

• Companies whose turnover from individual regulated or non-regulated products/services is less than INR 10 crore.

• Companies engaged in export or SEZ activities and meet specific exemption clauses.

• One Person Companies (OPCs) and Small Companies as defined under the Companies Act, 2013, unless specifically notified.

Foreign Companies

Foreign companies operating in India are not automatically required to maintain cost records unless they fall under the classification of an Indian company under Section 2(42) of the Companies Act. Additionally, if a foreign company operates through a branch office or project office in India, and engages in production, processing, or manufacturing activities listed under regulated or non-regulated sectors, and exceeds the specified threshold, it may be required to maintain cost records.

SMEs (Small and Medium Enterprises)

SMEs are generally exempt from cost record maintenance unless:

• Their turnover from relevant activities exceeds INR 35 crore.

• They are engaged in a regulated sector and meet cost audit applicability thresholds.

• They are publicly listed or have significant stakeholder interest that demands audit transparency.

Applicability Checkpoint:

• ✅ Turnover Threshold: Total turnover > INR 35 crore.

• ✅ Sector Specific Threshold: Revenue from specific product/service > INR 10 crore.

• ✅ Company Type: Exemption for OPCs, SMEs, and foreign entities subject to nature of activity.

By providing this clear compliance roadmap, Rule 3 ensures that the cost record requirements are appropriately targeted, reducing unnecessary burden on smaller or less complex businesses.

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Consequences of Non-Compliance

Failure to comply with the Companies (Cost Records and Audit) Rules, 2014, can lead to serious regulatory and financial consequences for businesses. With the Ministry of Corporate Affairs (MCA) stepping up enforcement and digital scrutiny, companies must ensure timely and accurate cost reporting.

Penalties for Not Maintaining Cost Records

As per Section 148 of the Companies Act, 2013:

• If a company required to maintain cost records fails to do so, it shall be liable to a penalty of INR 25,000.

• The officer in default (e.g., CFO, Managing Director) shall also be penalized with a fine of up to INR 50,000, or imprisonment up to 1 year, or both, depending on the nature and severity of the violation.

Penalties for Non-Filing or Incorrect Filing of Cost Audit Report

• If a company fails to submit CRA-4 (Cost Audit Report) within the stipulated time frame (generally within 180 days from financial year end), penalties include:

  • Late fees on MCA portal.

  • Additional fines as prescribed under Section 450 of the Companies Act.

MCA Notices & Inspections

The Ministry of Corporate Affairs regularly conducts compliance checks and inspections:

• Non-submission of CRA-2 (appointment of cost auditor) or CRA-4 can trigger automatic MCA notices.

• Discrepancies in cost audit reports may lead to detailed scrutiny or cost audit by MCA-empaneled auditors.

• Non-compliance may reflect in the company’s MCA Master Data, impacting credibility with investors and banks.

Risk of Director Disqualification

Continuous non-compliance with cost audit requirements can lead to disqualification of directors under Section 164 of the Companies Act, 2013. A director of a company that has not filed financial statements or annual returns (including cost audit filings) for three consecutive years becomes ineligible to be reappointed.

Impact on Credit Rating and Investor Trust

Non-compliance with cost audit rules may:

• Raise red flags with credit rating agencies.

• Negatively impact investor confidence.

• Cause issues during due diligence in mergers, acquisitions, or funding rounds.

Real-World Implication:

Consider a company in the cement industry (a non-regulated sector) that crosses the turnover threshold but fails to appoint a cost auditor via CRA-2. This not only invites a notice from MCA but can also be flagged during statutory audits, leading to reputational damage and increased scrutiny in future filings.

Compliance Checklist to Avoid Penalties:

• ✅ Verify applicability using Rule 3.

• ✅ Maintain detailed cost records if thresholds are met.

• ✅ Appoint a qualified Cost Auditor via CRA-2.

• ✅ Submit Cost Audit Report in CRA-4 on time.

• ✅ Respond promptly to any MCA notices.

Maintaining cost records isn’t just a legal formality—it’s a critical aspect of transparent financial management, audit readiness, and long-term compliance. With stricter digital oversight from the MCA, businesses must proactively ensure adherence to the Companies (Cost Records and Audit) Rules, 2014, and avoid falling into the trap of penalties or disqualifications.

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📢 Need Help with Cost Record Compliance?
Visit SSCOIndia.com for expert assistance with:

• Cost Audit Compliance

• CRA-2 & CRA-4 Filing

• MCA Notices and Response Handling

Also, check out our latest blogs:

• Step-by-Step Guide to Preparing for a Cost Audit in India 2025

• Difference Between Cost Audit and Financial Audit: Which One Do You Need?

Final Compliance Checklist for Companies (2025)

Ensuring cost compliance under the Companies (Cost Records and Audit) Rules, 2014 is not just about avoiding penalties—it's a step towards stronger financial transparency and better internal controls. Here's a comprehensive Cost Audit Compliance Checklist 2025 that businesses must follow to avoid regulatory hassles and MCA scrutiny.

✅ Check Industry Classification
Start by determining whether your company falls under the Regulated or Non-Regulated sectors as per Rule 3 of the Companies (Cost Records and Audit) Rules, 2014. This classification impacts whether your business must maintain cost records and undergo cost audits.

✅ Assess Financial Thresholds
Even if your industry is covered, you might be exempt if you fall below the threshold. As per the amendments up to July 15, 2016, cost record maintenance and audit applicability depend on:

• Overall turnover (≥ ₹35 crore for cost records, ≥ ₹100 crore for cost audit)

• Export revenue

• Listing status (listed/unlisted)

• Net worth

✅ Appoint Qualified Cost Auditor (CRA-2 Filing)
If your company meets the cost audit criteria, you must appoint a qualified Cost Auditor and file CRA-2 with the Ministry of Corporate Affairs (MCA) within 180 days from the start of the financial year.

✅ Maintain CRA-1 Form Records
Companies required to maintain cost records must do so as per the CRA-1 format, which outlines the structure and data points for compliance. These include cost elements like raw materials, wages, overheads, utilities, depreciation, etc.

✅ File CRA-4 Report Timely
After the cost audit is completed, companies must file the CRA-4 report electronically with the MCA within 30 days from the date of receiving the cost audit report. Late filing may attract hefty penalties.

🔍 Pro Tip: Always keep track of MCA notifications and circulars. Changes in applicability thresholds or sector lists can impact your compliance status year-on-year.

Conclusion

Cost audit and cost record compliance under the Companies Act, 2013 is more than a formality—it's an essential tool for corporate governance, financial accuracy, and operational transparency.

With the MCA increasingly focusing on enforcement, non-compliance is no longer an option. Companies that proactively manage their cost records and audits not only reduce their regulatory risk but also enhance stakeholder trust and decision-making capabilities.

Given the technical complexity of these rules and the industry-specific requirements, businesses—especially in manufacturing, utilities, and services—should not delay seeking expert guidance. A qualified cost accountant can help you:

• Assess applicability of cost records & audit

• Prepare CRA-1 formatted records

• Appoint cost auditors

• File CRA-2 and CRA-4 on time

• Stay updated with legal amendments

📢 Don't wait for a compliance notice from the MCA. Be proactive, stay compliant, and protect your business from avoidable penalties.

CTA: Need Help with Cost Records or Audit Compliance?

✅ Book a Free Consultation with SSCOIndia Experts – Our team of experienced cost accountants and audit professionals will help you decode the Companies (Cost Records and Audit) Rules, 2014 and ensure your business is 100% compliant in 2025.

📚 Related Reads from SSCOIndia:

• 🔗 Difference Between Cost Audit and Financial Audit: Which One Do You Need?

Let SSCOIndia be your trusted compliance partner for all your cost record and audit needs. Contact us today!