Delhi HC: Coal Beneficiation Is a Manufacturing Process That Requires a Cost Audit

The Delhi High Court has ruled that the process of coal beneficiation involves 'manufacturing' and 'processing' of goods, thereby making companies engaged in such activities liable to comply with statutory cost audit requirements.

In a judgment delivered by Justice Neena Bansal Krishna, the court dismissed a petition seeking to quash a criminal complaint filed against a company for failing to appoint a cost auditor as mandated under the Companies Act, 2013. The court emphasized that the physical and chemical upgrading of coal through washing creates a value-added product distinct from raw coal.

The Mandate for Cost Records and Audit

The court examined the scope of Section 148 of the Companies Act, 2013 read with the Companies (Cost Records And Audit) Rules, 2014. It was observed that the Central Government possesses the authority to direct the audit of cost records for specific classes of companies engaged in the production of goods or provision of services. The petitioner had argued that it was merely a service provider washing coal for third parties and not a manufacturer.

However, the court noted that the petitioner's own filings in Form AOC-4 XBRL mentioned 'ITC Code 27011910', which pertains to 'Mineral fuels (other than petroleum)' under Rule 3 of the Companies (Cost Records And Audit) Rules, 2014.

Defining 'Manufacture' and 'Production'

To determine if beneficiation constitutes manufacturing, the court relied on several landmarks. It referred to Tata Steel Ltd. v. Union of India and Ors. ( "(2015) 6 SCC 193": 2015 CaseBase(SC) 514) to explain that coal washing is an industrial process that improves coal quality by removing impurities like ash and sulphur, increasing its heating value and weight.

While discussing the legal definitions of 'produce' and 'process', the court cited Commissioner of Income Tax, Kerala vs. Tara Agencies, noting that 'produced' has a wider meaning than 'manufacture' and includes activities that apply human endeavor to raw materials to bring new goods into existence. The court further referenced the two-fold test established in Union of India & Others vs. J.G. Glass Industries Ltd. & Others, which assesses whether a different commercial commodity emerges and whether the original commodity's identity ceases to exist.

In its reasoning, the court observed: "...the raw coal when subjected to Beneficiation, results in a product which is much better and is s higher quality of coal. Not only this, there are certain by-products, some of which can be used for producing charcoal and other products... the Beneficiation of Coal falls in the category of 'manufacture'. Rules 3 and 4 of the Companies (Cost Records And Audit) Rules, 2014 provides for the requirement of Cost Records and Cost Audit, to be applicable to such a product or service."

Court Directions

The Court has the following directions:

"It is hereby clarified that the observations made herein are confined to adjudication of the present Petition, and does not tantamount to expression on the merits of the case. In light of the aforesaid discussion, it cannot be said that per se Beneficiation of Coal is not a manufacturing process, thereby, entitling the Petitioner Company to quashing of the Criminal Complaint filed under Section 148 of the Companies Act, 2013. There is no merit in the present Petition, which is hereby, dismissed."

Background:

The dispute originated when the Registrar of Companies (ROC) issued notices to the Petitioner, Aryan Energy Pvt. Ltd., for failing to appoint a Cost Auditor for the Financial Year 2015-16. The Petitioner contended that its activity of coal beneficiation did not fall under the prescribed categories for cost audit since it did not own the coal it processed.

The Respondents, represented by the Ministry of Corporate Affairs, argued that the law does not provide exemptions based on the ownership of raw materials. They maintained that beneficiation is an integral part of the value chain of coal. The court agreed, stating that excluding such processes from cost record maintenance would defeat the legislative intent of allowing the Central Government access to the cost records of the entire value chain.

Ultimately, the High Court found that since the process results in a significant transformation and value addition, it qualifies as manufacturing. The petition under Section 482 of the Code of Criminal Procedure, 1973 was dismissed, and the criminal proceedings before the Additional Chief Metropolitan Magistrate were allowed to continue.

Case Details:
Case No.: CRL.M.C. 4350/2018
Case Title: ARYAN ENGERY PVT. LTD. v. UNION OF INDIA & ORS.
Appearances:
For the Petitioner(s): Mr. Raghvendra K. Singh and Mr. Ashish Shukla, Advocates.
For the Respondent(s): Ms. Pratima N. Lakra, CGSC with Mr. Shailendra Kumar Mishra and Mr. Chanakya Kene, Advocates.

Source: 2026 CaseBase(DEL) 405