Facts
Aryan Energy Pvt. Ltd. was engaged in coal beneficiation (coal washing) for Coal India subsidiaries. The company did not appoint a Cost Auditor under Section 148 of the Companies Act, 2013, claiming that coal washing was only a service activity and not manufacturing. The Ministry of Corporate Affairs (MCA) issued a notice and later initiated prosecution for non-compliance with the Cost Audit provisions. The company approached the Delhi High Court seeking to quash the criminal complaint.
Issue
Whether coal beneficiation (coal washing) amounts to manufacturing, thereby requiring the company to maintain cost records and appoint a cost auditor under Section 148 of the Companies Act, 2013.
Contentions
Company's Arguments
Coal washing is only a processing/service activity. No new product is manufactured, and coal remains coal even after washing. Therefore, the Cost Audit provisions do not apply.
Government's Arguments
Coal washing removes impurities and increases the quality and calorific value of coal. It improves the commercial value of coal and also produces by-products such as middlings
Courts Observations
The Court observed that coal beneficiation substantially improves the quality and commercial value of coal and also generates commercially useful by-products. Whether a particular activity amounts to manufacture depends on its effect and is a mixed question of law and fact, requiring evidence during trial. Therefore, it was not appropriate to quash the prosecution at the preliminary stage.
Decision
The Delhi High Court dismissed the petition and refused to quash the criminal complaint. It held that coal beneficiation may amount to manufacturing, and therefore the company could be required to comply with Section 148 of the Companies Act, 2013 relating to cost records and cost audit.
Key Learning
Coal beneficiation (coal washing) can be treated as a manufacturing activity if it significantly improves the quality and commercial value of coal. Companies engaged in such activities may therefore be required to maintain cost records and appoint a cost auditor under Section 148 of the Companies Act, 2013. Further, criminal proceedings should not be quashed at the initial stage where the issue requires examination of evidence and factual
determination.