Coal Beneficiation May Amount to Manufacturing, Prosecution for Non-Appointment of Cost Auditor Cannot Be Quashed: Delhi HC [Read Order]

The Delhi High Court has held that coal beneficiation (also known as coal washing) may amount to manufacturing. The court refused to quash criminal proceedings for not appointing a Cost Auditor under Section 148 of the Companies Act, 2013.

Aryan Energy Pvt. Ltd. filed a petition seeking quashing of a criminal complaint filed against it. The complaint alleged that the company had failed to appoint a Cost Auditor and had not submitted the Cost Audit Report for the financial year 2015-16.

The company’s counsel argued that it was only engaged in coal beneficiation or coal washing for coal-producing companies. They stated that it did not mine coal, extract coal or manufacture any coal product. According to the company, coal washing was only a service activity and was not covered under the Companies (Cost Records and Audit) Rules, 2014.

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The company’s counsel also argued that since its activity was not covered under Rule 3 of the Rules, it was not required to maintain cost records or appoint a Cost Auditor. They relied on the statutory auditor’s report, which stated that the Central Government had not prescribed maintenance of cost records for the services rendered by the company.

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The Union of India and Registrar of Companies argued that the company itself had declared ITC Code 27011910 in Form AOC-4 XBRL. They argued that this code falls under mineral fuels, which are covered under Rule 3. They further stated that the company satisfied the turnover requirement and was legally required to appoint a Cost Auditor.

The respondents’ counsel also argued that coal beneficiation improves the quality of raw coal by removing ash and other impurities. They stated that the process makes coal more useful, valuable and marketable.

Justice Neena Bansal Krishna observed that the company’s Memorandum of Association showed that its business was connected with mining, working and production of minerals, including coal. The Court also observed that the company had described its activity as “Coal Beneficiation and Allied Activities” in its filings.

The court explained that coal beneficiation improves the quality and grade of coal and results in a commercially better product. It further observed that whether the process used by the company actually amounts to manufacturing is a mixed question of fact and law, which requires evidence at trial.

The court held that the complaint could not be quashed at the initial stage. The petition was dismissed and the criminal proceedings were allowed to continue.

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