Cost Records and Cost Audit for Pharmaceutical Companies: What the Companies (Cost Records and Audit) Rules, 2014 Actually Require
- Dhananjay Jadhav
- 3 days ago
- 9 min read
By CMA Dhananjay Jadhav, Founder — DP Jadhav & Co. | Past Chairman, Nashik Chapter, ICMAI (2025–26)
Pharmaceutical manufacturing is one of only a handful of industries that the Government of India treats as a regulated sector for cost accounting purposes. That single classification changes the compliance position of a pharma company significantly — the thresholds are lower, the scrutiny is higher, and the obligation arises automatically the moment turnover crosses the prescribed limit. No notice is issued. No reminder is sent.
In our practice we regularly meet promoters of growing pharma units who first hear the words "cost records" from their statutory auditor — often at the year-end audit, sometimes when a show-cause notice arrives from the Registrar of Companies. By then the position is remedial rather than preventive, and remediation is always the costlier route.
This article sets out, in plain terms, what the law requires, who it applies to, when it applies, and what a compliant system looks like.
1. The legal framework
The obligation flows from Section 148 of the Companies Act, 2013, read with the Companies (Cost Records and Audit) Rules, 2014 (as amended from time to time).
The Rules divide covered industries into two tables:
Table A — Regulated Sectors: telecommunication, electricity generation / transmission / distribution, petroleum products, drugs and pharmaceuticals, fertilisers, sugar and industrial alcohol.
Table B — Non-Regulated Sectors: a long list covering machinery, steel, cement, rubber, plastics, electricals and others.
Drugs and pharmaceuticals appear in Table A, covered by CETA headings 2901 to 2942 and 3001 to 3006. This covers bulk drugs/APIs, formulations, and a wide range of organic chemicals used in pharmaceutical manufacture. The relevant question for any company is not "am I in the pharma business" in a loose commercial sense, but whether the goods it manufactures fall within these tariff headings.
Why "regulated" matters: Table A industries face a lower cost audit threshold (₹50 crore / ₹25 crore) than Table B industries (₹100 crore / ₹35 crore). A pharma company therefore enters the cost audit net at roughly half the turnover of a comparable engineering company.
2. Two separate obligations — do not confuse them
This is the single most common misunderstanding we encounter. Maintaining cost records and getting a cost audit done are two distinct obligations with two different thresholds. A company can be required to maintain cost records while not yet being required to have them audited.
Obligation | Threshold for a pharma (Table A) company | Basis |
Maintenance of cost records (Rule 3) | Overall turnover from all products and services is ₹35 crore or more in the immediately preceding financial year | Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 |
Cost audit (Rule 4) | Both conditions must be met: (a) overall annual turnover from all products and services is ₹50 crore or more; and (b) aggregate turnover of the individual product(s)/service(s) for which cost records are required is ₹25 crore or more — in the immediately preceding financial year | Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 |
Read that table carefully. A pharma company with turnover of ₹38 crore must maintain cost records but is not yet required to appoint a cost auditor. A company at ₹60 crore turnover with ₹30 crore of covered pharma products meets both limbs and must have a cost audit.
The practical consequence is important: the ₹35 crore stage is the window in which a company should be building its cost accounting system. Companies that use that window arrive at the cost audit stage with clean, auditable records. Companies that ignore it arrive there with a reconstruction exercise on their hands.
3. Who is exempt
The Rules provide specific exclusions. A company is outside the requirement if:
Its revenue from exports in foreign exchange exceeds 75% of its total revenue; or
It is operating from a Special Economic Zone (SEZ); or
It is engaged in generation of electricity for captive consumption (relevant to captive power plants); or
It is classified as a micro enterprise or a small enterprise, including as per the turnover criteria under Section 7(9) of the MSMED Act, 2006.
The micro/small exemption deserves care. MSME classification was revised with effect from 1 April 2025 (Notification S.O. 1364(E) dated 21 March 2025). A small enterprise now means investment in plant and machinery up to ₹25 crore and turnover up to ₹100 crore. The test is composite — an enterprise must satisfy both limits.
For pharma, this is rarely the free pass it appears to be. A formulation or API plant with WHO-GMP infrastructure, clean rooms, HVAC, utilities and analytical instrumentation will very often cross ₹25 crore in plant and machinery, which pushes the unit into the medium category and back inside the Rules — even though its turnover is comfortably under ₹100 crore. Each case turns on the actual investment figure and the classification recorded on the Udyam registration. This is not a determination to make casually.
4. What "cost records" actually means
Cost records are not the financial ledger with a different label. They are a separate, product-wise costing system, maintained on a regular basis, in the format prescribed under Form CRA-1. CRA-1 prescribes the particulars to be covered — broadly:
Material cost — receipt, issue, consumption and closing stock of raw materials, packing materials, stores and spares, with product-wise reconciliation of quantity and value
Employee cost — direct and indirect, with a rational basis of apportionment across cost centres
Utilities — power, steam, water, compressed air, chilled water; separate cost statements where generated in-house
Repairs and maintenance, depreciation and amortisation
Overheads — production, administrative, selling and distribution, with a disclosed and consistent absorption basis
Research and development cost — of particular relevance to pharma, including product development, stability studies and bio-equivalence expenditure
Quality control cost — in-house QC/QA and outsourced testing
Pollution control cost — effluent treatment, incineration, hazardous waste disposal
Royalty and technical know-how fees
Packing, distribution, interest and financing charges
Joint products, by-products, scrap, wastage and process losses
Related party transactions and inter-unit/inter-company transfers at arm's length
Capacity determination — installed and actual capacity utilisation, and treatment of idle capacity cost
Reconciliation of cost records with financial statements
Two features distinguish compliant records from a spreadsheet exercise: they must be maintained on a regular basis (contemporaneously, not compiled after year-end), and they must reconcile to the audited financial statements. A costing file that cannot be tied back to the profit and loss account is of no evidentiary value.
Pharma-specific pressure points
In our experience, the areas where pharmaceutical companies most often struggle are:
Batch-wise to product-wise conversion. Manufacturing happens in batches; costing must be reported product-wise. The bridge between the two is where accuracy is usually lost.
Loan licence and third-party (P2P) manufacturing. Deciding what constitutes cost of the marketer versus the manufacturer, and how conversion charges are treated, requires a documented policy.
Multi-product common facilities. A single granulation or compression line running dozens of SKUs needs a defensible, consistent absorption basis — machine hours, batch hours or standard batch size.
R&D and regulatory filing cost. Whether ANDA/dossier expenditure is capitalised, deferred or charged off materially affects product cost and must be applied consistently.
DPCO-scheduled formulations. Price control obligations under the Drugs (Prices Control) Order, 2013 and NPPA filings draw on the same cost data. Inconsistency between what is filed with NPPA and what appears in the cost records is a genuine exposure.
Yield, wastage and process loss. Normal versus abnormal loss must be identified and treated separately, not absorbed silently into product cost.
5. The compliance calendar
Where cost audit applies, four forms govern the cycle.
Form | Purpose | Timeline |
CRA-1 | Prescribes the particulars of items of cost to be included in the books of account — the format for maintaining cost records | Ongoing, throughout the financial year |
CRA-2 | Intimation to the Central Government of appointment of the cost auditor | Within 30 days of the Board meeting approving the appointment, or within 180 days of the commencement of the financial year, whichever is earlier |
CRA-3 | The cost audit report, submitted by the cost auditor to the Board of Directors | Within 180 days from the close of the financial year |
CRA-4 | Filing of the cost audit report with the Central Government, in XBRL format | Within 30 days of receipt of the report from the cost auditor |
For a company following the April–March financial year, this means the cost auditor should ordinarily be appointed and CRA-2 filed by around end-September of the relevant year — not at year-end. An appointment made in, say, February for the year ending 31 March is already outside the statutory window, regardless of whether the audit itself is eventually completed.
Who can be appointed
Only a Cost Accountant in practice (individual or a firm of cost accountants) may be appointed as cost auditor.
The statutory (financial) auditor cannot be the cost auditor. These are separate appointments with separate scopes.
The appointment is made by the Board of Directors; the remuneration is fixed by the Board and ratified by the shareholders.
The cost audit report is placed before the Board, and any qualifications or observations must be addressed by the Board with full explanations in its report.
6. Penalties for non-compliance
Section 148(8) read with Section 147 of the Companies Act, 2013 applies:
On the company: fine of not less than ₹25,000, extending up to ₹5,00,000.
On every officer in default: fine of not less than ₹10,000, extending up to ₹1,00,000 — with imprisonment provisions applicable in specified circumstances.
On the cost auditor for contravention of the relevant provisions: separate penal consequences under Section 147(2) to (4).
Beyond the statutory fine, the practical costs tend to be larger:
Show-cause notices from the Registrar of Companies — the MCA has been actively issuing these for non-maintenance of cost records
Adverse remarks in the statutory audit report and Board's report, visible to every lender, customer and investor who reads the accounts
Reconstruction of several years of costing data under time pressure, which is invariably more expensive than maintaining it prospectively
Weakened position in NPPA/DPCO representations and in customer or institutional due diligence, where audited cost data carries weight
7. A readiness check for your company
Six questions. If the answer to more than one is uncertain, the position deserves a formal review.
What was our overall turnover in the immediately preceding financial year — and does it cross ₹35 crore? ₹50 crore?
What is the turnover of our products falling under CETA headings 2901–2942 / 3001–3006, and does it cross ₹25 crore?
Are we correctly classified under the MSMED Act on both the investment and turnover criteria — and can we evidence it?
Do we maintain product-wise cost records in CRA-1 format on an ongoing basis, or do we compile costing only when someone asks?
Can our cost records be reconciled to the audited financial statements without a fresh exercise?
If a cost audit is applicable, has CRA-2 been filed within the statutory window, and is a named person accountable for the CRA-3/CRA-4 timeline?
8. Compliance as management information
It would be a narrow reading of Section 148 to treat it purely as a filing obligation. The data set the Rules require — product-wise material consumption, yield and process loss, capacity utilisation, utility cost per unit, overhead absorption — is precisely the information a manufacturing business needs to run itself well.
A pharma company with properly maintained cost records can answer questions that many of its competitors cannot: which SKUs genuinely earn their keep after full absorption; what idle capacity is costing each month; whether a loan-licence arrangement is more economical than in-house manufacture; whether a price representation to NPPA is supportable; where yield loss is concentrated. That is not compliance overhead. That is the control system of a manufacturing business, which the statute happens to also require.
The companies that treat cost records as a management tool find the annual cost audit uneventful. The companies that treat it as a form-filling exercise find it stressful, expensive, and occasionally consequential.
Where we can help
DP Jadhav & Co. advises pharmaceutical manufacturers on cost record systems, cost audit under Section 148, and cost data for DPCO/NPPA purposes. If you are unsure whether the Rules apply to your company — or whether your existing records would withstand an audit — a preliminary applicability assessment is usually a short exercise. You are welcome to get in touch.
Disclaimer: This article is intended as general information on the Companies (Cost Records and Audit) Rules, 2014 and reflects the position as understood in July 2026. The Rules are amended periodically and applicability depends on the specific facts of each company, including its tariff classification, MSMED status and turnover composition. This is not professional advice and should not be acted upon without a company-specific assessment. Readers should verify the current text of the Rules and consult a practising Cost Accountant before taking any decision.
References
Companies (Cost Records and Audit) Rules, 2014 — ICMAI
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