CHAPTER 13
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| P.O. No. | Date | Supplier | Description | Quantity | Price |
| D3/99/P477 | 5 August 1999 | M/s. Titania S.P.A., Italy | Titanium tubes | 21,000 pieces | US $ 0.705 million (Rs.3.07 crore) |
| ES/99/P440 | 23 July 1999 | M/s. Nobel Explosifs, France | Titanium clad carbon steel tube plates |
4 Nos. | FF 1.28 million (Rs.84.31 lakh) |
The entire supply of titanium tubes and 2 of the 4 titanium-clad plates was received in January 2000 and February 2000 respectively against payment of Rs.3.51 crore to the foreign suppliers through LCs. The Unit also paid (August 2001) a sum of Rs.2.21 crore towards customs duty, Rs.51 lakh towards interest on customs duty and Rs.4 lakh towards warehousing charges.
As the TNEB failed to provide the escrow cover as promised, the Customer did not issue the NTP and finally terminated the contract as per clause 3.2.5 of the Agreement. The entire material already received was lying idle. The foreign supplier had been pressing the Unit for payment for the balance 2 titanium plates that had been ready for despatch since September 2000, along with interest thereon.
Management, while confirming the above facts stated (March 2002) that advance manufacturing action was taken by the Unit pending receipt of NTP from the Customer with the approval of competent authority to achieve the tight delivery commitment and avoid liability against stringent liquidated damage clause. It further stated that efforts were being made for utilising the material in the future orders.
The reply of Management is, however, not tenable in view of the explicit requirement of NTP which should have made it clear to the Company that any liability undertaken prior to receipt of NTP would be at its own risk and cost. The contention of Management that it had to meet tight delivery commitment and avoid LD is also not tenable in as much as the supply of surface condenser for which the material had been procured was due for delivery only after achieving the mile stones laid down in the contract in respect of gas turbines. As such procurement of Titanium tubes and plates well ahead of NTP was not justified. The contention of Management regarding utilisation of the material in future orders is also not factually correct as the Company’s attempts to resell the material to the supplier failed as the latter refused the offer stating that the material being tailor made to the Company’s specifications would not find any takers. The Plant could not find alternate customer(s)/users for the material so far (April-2002).
Thus, procurement of material without any firm commitment by way of NTP or supply order from the Customer resulted in locking of funds to the tune of Rs.6.27 crore which may eventually burn out to be a total loss due to bleak prospects of its utilisation/disposal in the near future.
The matter was referred to Ministry in May 2002; their reply was awaited (September 2002).
The Company applied incorrect rate of sales tax on the supplies and subsequently paid Rs.5.06 crore to tax authorities under protest.
The Industrial Sector Group of the Company received (July 1997) an order from Hindustan Petroleum Corporation Limited (Customer) for supply of two 25 MW Gas Turbine Generator (GTG) sets along with matching heat recovery steam generator for expansion of its captive power plant at Visakha Refinery. The total price of the order was Rs.135.78 crore. The Company in turn placed (September 1997) an internal order for supply of GTGs at a price of Rs.92.30 crore on its Hyderabad Unit (Unit). The price allotted to the Unit was inclusive of Andhra Pradesh General Sales Tax (APGST) at the reduced rate of 3 per cent as per the Government of Andhra Pradesh order dated 31 December 1994 which stipulated application of 3 per cent tax on sale of all kinds of machinery propelled or operated by any kind of power or fuel provided that they are used in the manufacture of goods in the state of Andhra Pradesh. The implicit assumption was that the GTGs to be supplied under this contract would qualify for this.
The equipment supplies commenced in March 1998. These were billed to the customer with APGST at 3 per cent. However, the Finance Department of the Unit objected (April 1998) this rate of 3 per cent sales tax and requested for raising of supplementary invoices for the different amount of tax as the GTGs could not be classified as machinery and that they attracted normal rate of 16 per cent APGST. The Commercial Tax Authorities of Government of Andhra Pradesh, who inspected the Unit in June 1998 also objected to the application of reduced sales tax rate (3 per cent) on the grounds that the GTGs, which were electrical goods, were not eligible for the reduced rate. They also pointed out that the Unit was all along paying tax at 16 per cent treating the GTGs as electrical goods. Despite this, the Unit went ahead and billed the supplies to the customer at a reduced rate of 3 per cent only. Eventually, the commercial tax authorities served six notices demanding differential tax of Rs.10.11 crore on the supplies effected between March 1998 and October 1999. The Unit however, went in appeal and paid Rs.5.06 crore in instalments between December 1998 and March 2000 under protest. It was seen further, that the Unit had raised an invoice on the customer only in August 2001 for Rs.5.06 crore which had not been recovered from the customer (June 2002).
Thus, Company’s funds to the tune of Rs.5.06 crore remain blocked since December 1998/March 2000 due to Management’s failure to correctly classify the GTGs under APGST initially and later to raise supplementary bill on the customer for the difference in amount of tax ignoring the advice of April 1998 of Unit’s Finance Department and the objections raised by the commercial tax authorities in June 1998.
Management stated (January 2002) that:
The reply is inconsistent as it states on the one hand that there was a saving clause in the contract to recover the tax actually paid and, on the other hand that the matter was being taken up with the customer to get the clause amended. The fact remains that the customer has not admitted any liability in regard to the Company’s claim of Rs.5.06 crore as preferred in August 2001 (August 2002).
The matter was referred to Ministry in May 2002; their reply was awaited (September 2002).
The Company suffered an avoidable loss of Rs.5.03 crore due to unrealistic estimate and delay in manufacture of pressure vessels.
The Company (Tiruchy Unit) received (June/November 1993) four orders from Gas Authority of India Limited (GAIL) for supply of 12 pressure vessels at a total price of Rs.6.12 crore. The delivery dates were between November 1994 and January 1995. The Company could deliver only two vessels within the delivery dates and the balance ten vessels were delivered by May 1996 with delay ranging from 2 to 16 months. The customer levied liquidated damages of Rs.61 lakh for delay in supply.
The Company incurred an expenditure of Rs.10.44 crore in execution of these orders and suffered an over all loss of Rs.5.03 crore, including cash loss of Rs.54 lakh as against an anticipated profit of Rs.51 lakh.
Main reasons for delays and cost overruns were:
Ministry stated (August 2001) that the increase in cost and delay in supply was due to:
The reply of Ministry is not tenable due to the following:
Thus, acceptance of the contract on the basis of unrealistic estimates and subsequent poor performance combined with delay in manufacturing resulted in delayed execution of the contract. As a result, the Company suffered an avoidable loss of Rs.5.03 crore.
The Company incurred a loss of Rs.4.07 crore due to non-adherence of delivery schedule and non-compliance of other terms and conditions of the contract.
The Company received (January 1998) an order for design, manufacture and supply of Steam turbine-driven recycle gas compressor along with accessories and spares for a value of Rs.20.09 crore from M/s. Larsen & Toubro Limited, Mumbai for execution of a project at Cochin Refineries Limited, Cochin. The delivery was to be made within 12 months from the date of letter of intent (LOI) i.e. by 30 January 1999.
The terms and conditions of the above supply order stipulated that: (a) delivery was the essence of the contract and in case of delay, the contract price would be reduced by 1.5 per cent of the total order value per week of delay or part thereof subject to a maximum of 15 per cent of total order value; and (b) excise duty was applicable only on item manufactured in-house and was to be reimbursed against documentary evidence at the then prevailing rate of 13 per cent. Statutory variation in taxes and duties would be applicable within contractual delivery period.
The Company entrusted the execution of the entire contract to its manufacturing Unit at Hyderabad. The Unit completed the supplies of main equipment by March 2000 and spares by March 2001 with a delay of 14 months and 26 months from the scheduled delivery date respectively.
In execution of the contract the Unit substituted direct delivery (bought out) items with in-house manufactured items by Rs.4.20 crore on which excise duty was not reimbursed as per contract. Further, supplies worth Rs.11.79 crore (main equipment Rs.11.01 crore and spares Rs.78 lakh) were despatched between 1 March 1999 and 31 March 2001 which attracted higher duty @ 16 per cent as the Government of India had increased the rate of excise duty from 13 per cent to 16 per cent on gas compressors with effect from 1 March 1999. The customer was, however, liable to reimburse variation in duties that take place within contractual period i.e. up to 30 January 1999. The customer accordingly, reimbursed only Rs.1.92 crore as per the agreed terms of contract, as against the excise duty of Rs.2.94 crore paid by the Company. The Unit, thus, could not recover Rs.1.06 crore (excise duty Rs.1.02 crore plus central sales tax Rs.4 lakh) from the customer due to supply of more bought out items instead of in-house manufactured items and due to its failure in supply of the equipment as per scheduled delivery of the contract.
The customer also invoked the price reduction clause and withheld amounts to the tune of Rs.3.01 crore (Rs.2.36 crore towards main equipment and Rs.65 lakh towards spares) as on 31 March 2001 due to inordinate delay in supply of both the main equipment and spares in terms of the contract.
Management stated (April 2002) that the values of excisable supplies were known only after detailed engineering. An increase in in-house manufactured supplies had the positive effect on the capacity utilisation of the plant. The reply of Management is not tenable, since the Company knew that as per terms of the contract, excise duty on bought out items was payable up to a predetermined quantum and the enhanced excise duty on in-house manufactured items was not payable beyond the stipulated date of delivery. In the circumstances, disturbing the mix between the manufactured items and brought out items and over shooting the delivery period was not a prudent decision.
Management attributed the delays to changes in configuration of compressor and turbine arrangement when the machining of compressor casing was in advanced stage. The Company was making efforts to get the delivery extended so that the liquidated damages were waived. The contention of Management is not tenable. If the changes in configuration were indeed as far reaching as it was made out to be, the Company should have sought extensions in delivery schedule before accepting such changes.
Thus, the Unit’s failure in adhering to the contract conditions and delivery schedule resulted in a loss of Rs.4.07 crore.
The matter was referred to Ministry in May 2002; their reply was awaited (September 2002).
The Company accepted a contract assuming deemed export benefits which were not actually available and also delayed supply which resulted in an avoidable loss of Rs.4.03 crore on account of payment of excise duty and liquidated damages.
In response to the invitation of bids by Oil and Natural Gas Corporation Limited (ONGC) (Customer), the Company submitted (July 1993) its bid for supply, erection and commissioning of Frame-5 gas turbine to the co-generation plant of Hazira Phase III expansion project. The customer issued Notification of Award of the contract on 1 April 1994 for a firm price of Rs.51.71 crore plus FF 9.35 million (Rs.5.54 crore) inclusive of all taxes with a completion date of 24 months from the date of Notification of Award. The contract price was finalised taking into consideration deemed export benefits that were built into Company’s price bid. However, Government of India (GOI) amended the EXIM policy with effect from 30 March 1994,as a result of which this project became ineligible for benefits of deemed export project. Despite being aware of this fact, the Company accepted the contract (July 1994) in the anticipation that GOI would protect it under transitional arrangement.
The Company placed an internal order on Hyderabad Unit (September 1994) with a price allocation of Rs.37 crore plus FF 9.35 million (Rs.5.54 crore). The contract was completed in February 1999 with a delay of 38 months. In execution of the contract the Unit paid excise duty of Rs. 1.71 crore and sought its reimbursement from the customer. As there was no such stipulation in the contract for recovery of variations in statutory duties, the Unit could not get the reimbursement of excise duty of Rs.1.71 crore from the customer. It, however, sought the assistance of the customer to take up the matter with Ministry of Commerce for getting deemed export status. Ministry clarified that all cases where letter of intent (LOI) had been issued by ONGC/OIL (Oli India Limited)/GAIL (Gas Authority of India Limited) on or before 29 March 1994 would be entitled to deemed export benefits as enunciated in the pre-revised policy. As the customer issued the Notification of Award on 1 April 1994, the Company could not avail the deemed export benefits.
Further, the customer withheld Rs.4.16 crore towards liquidated damages (LD) on account of delays in execution of contract. As a result, the Company instead of making a net profit of Rs. 13.24 lakh; made a net loss of Rs.4.03 crore (inclusive of excise duty of Rs.1.71 crore).
Ministry stated (March 2002) that in order to avoid forfeiture of security deposit of Rs.1.30 crore and blacklisting in future jobs, BHEL had to go ahead with signing of the contract without any relief against variation in statutory changes of deemed export status. Ministry further stated that BHEL’s proposal for formal delivery extension and waiver of LD was under active consideration of ONGC and might be decided in BHEL’s favour.
The contention of Ministry is, however, not tenable as the Company failed to include any clause in the contract for recovery of variations in statutory duties and also due to non-completion of the work on schedule. More so, BHEL’s requests for extension of delivery time and waiver of LD as made during January 1998 to January 2001 had not been considered by the ONGC’s technical committee so far (May 2002).
Thus, the decision of Management in accepting the contract with a price that included deemed export benefits, which were not actually available and also its failure to complete the contract on schedule had resulted in an avoidable loss of Rs.4.03 crore on account of excise duty and LD.
The Company incurred a loss of Rs.2.88 crore due to non-adherence of delivery schedule and non-compliance of other terms and conditions of the contract.
The Company received (January 1998) an order for design, manufacture and supply of gas compressors and accessories including spares for a value of Rs.19.29 crore (main equipment Rs.16.05 crore and spares: Rs.3.24 crore) from M/s. Larsen & Toubro Limited, Mumbai for execution of a project at Hindustan Petroleum Corporation Limited Vizag. The delivery was to be made within 10 months from the date of letter of intent i.e. by 29 November 1998.
The terms and conditions of the above supply order stipulated that: (a) Delivery was the essence of the contract and in case of delay, the contract price would be reduced by 1.5 per cent of the total order value per week of delay or part thereof subject to a maximum of 15 per cent of total order value; and (b) excise duty was applicable only on items manufactured in-house and was to be reimbursed against documentary evidence at the then prevailing rate of 13 per cent. Statutory variation in taxes and duties would be applicable within contractual delivery period.
The Company in turn allocated a major portion of supplies valued at Rs.14.65 crore (main equipment: Rs.11.37 crore and spares: Rs.3.28 crore) to its Unit at Hyderabad. The Unit had, however, completed the supplies of main equipment and spares by March 2000 and May 2001 with a delay of 16 months and 30 months respectively.
In execution of the contract the Unit substituted direct delivery (bought out) items with in-house manufactured items by Rs.2.48 crore on which excise duty was not reimbursed as per contract. Further, supplies worth Rs.10.41 crore (equipment: Rs.8.71 crore and spares: Rs.1.70 crore) were despatched from 1 March 1999 which attracted higher duty @ 16 per cent as the Government of India had increased the rate of excise duty on gas compressors with effect from 1 March 1999. The customer was, however, liable to reimburse variation in duties that take place within contractual period i.e up to 29 November 1998. The customer accordingly reimbursed only Rs.1.39 crore as per the agreed terms of contract, as against the excise duty of Rs.2.03 crore as paid by the Company. The Unit, thus, could not recover Rs.70 lakh (excise duty: Rs.64 lakh plus central sales tax: Rs.6 lakh) from the customer due to supply of more bought out items in place of in-house manufactured items and due to its failure in supply of the equipment as per scheduled delivery of the contract.
The customer also invoked the price reduction clause and withheld amounts to the tune of Rs.2.18 crore (main equipment: Rs.1.71 crore and spares: Rs.47 lakh) as on 31 March 2001 due to inordinate delay in supplies of the main equipment and spares in terms of the contract.
Management stated (March 2002) that the values of excisable supplies were known only after detailed engineering of the project. An increase in in-house manufactured supplies had a positive effect on the capacity utilisation of the plant. The reply of Management is not tenable since the Company knew that as per terms of the contract, excise duty on bought out items was payable up to predetermined quantum and the enhanced excise duty on in-house manufactured items was not payable beyond the stipulated date of delivery. In the circumstances disturbing the mix between the manufactured items and bought out items and over shooting the delivery period was not a prudent decision.
As for the delays, Management stated that certain equipment had to be reordered from a German supplier due to the US Sanctions. Consequently, it had to rework some of the specifications, which resulted in the delay. The Company made efforts to get the delivery date extended up to April 1999 so that the LD is waived. The contention of Management is not tenable. Since the sanctions were beyond the control of the Company, it should have sought extensions in delivery schedule at that point of time itself under the force majeure clause.
Thus, the Unit’s failure in adhering to the contract conditions and delivery schedule had resulted in a loss of Rs.2.88 crore.
The matter was referred to Ministry in May 2002; their reply was awaited (September 2002).
The Company accepted an order from a private party on firm price basis without finalising the design and engineering details. It incurred extra expenditure due to increase in quantities owing to change in design, which was not recoverable from the party. Resultantly, it had to bear a loss of Rs.2.78 crore on the contract.
The Company accepted (March 1995) an order from M/s. Sinarmas Pulp and Paper (India) Limited for erecting, testing and commissioning of a circulating fluidised bed combustion (CFBC) boiler with associated work of coal-handling plant (CHP), ash handling plant (AHP) and de-mineraliser (DM) plant at a lump-sum price of Rs. 6.68 crore. Though the Company was executing such order for the first time, it accepted to execute the work on firm and fixed price basis without finalising the design and engineering details.
The work, scheduled to be completed in October 1996, was actually completed in March 1999 at a cost of Rs.9.55 crore by incurring extra expenditure of Rs.2.87 crore. The increase in cost was attributable to abnormal increase of 1947 MT in the erected weight (7541 MT) as compared to the originally designed weight (5594 MT) owing to several changes in design and engineering details relating to air heater and chain conveyor arrangements as enumerated below.
Overall, there was an increase of 35 per cent in the executed quantities against the estimated variation of 5 per cent assumed at the tendering stage, which indicated faulty preparation of estimates. As the Company was undertaking such work for the first time, greater care was needed in finalising the design, estimating the cost and quoting the lump-sum price to a private party. However, the Company not only failed in estimating the workable cost, it did not keep adequate margin while submitting the price bid to safeguard its financial interest. Besides reflecting on the poor preparedness of the Company in estimation, the price quoted by them also reflected their inadequate commercial inputs.
While accepting the loss to the extent of Rs. 2.78 crore, Management stated (July 2001 and March 2002) that CFBC boiler, CHP and AHP were designed and supplied for the first time and as such it was not possible to freeze the design details to the micro level at the initial stage itself. During detailed engineering, the Company had to resolve many interface issues among its units and design was also revised as per technical recommendations of their consultant.
The reply is not convincing because while accepting such order, the Company should have protected its financial interests by maintaining adequate contractual safeguards, particularly when the order was accepted from a private party on firm price basis.
Thus, the Company suffered a loss of Rs. 2.78 crore due to faulty preparation of estimates and lack of proper contractual provisions.
The matter was referred to Ministry in December 2001; their reply was awaited (September 2002).
The Company failed to include a suitable clause in the contract for reimbursement of excise duty by the customer on engineering and design services which resulted in loss of Rs.1.89 crore.
The Company received (September 1995) a letter of intent (LOI) from Gujarat Industrial Power Company Limited (GIPCL) for the supply of two 390 T/H Circulating Fluidized Bed Combustion (CFBC) boilers for their 2 x 125 MW Surat Lignite Power Project (SLPP). The Company allocated the above order in the following works of Trichy Unit (Unit):
| Scope of the contract | Price (Rs. in crore) |
Scheduled date of completion |
| System engineering, Design and engineering of the package |
16.50 | Within 108 weeks from date of LOI |
| Manufacture, fabrication Assembly and supply of equipment |
166.94 | Within 24 and 26
month of date of LOI, i.e. September 1997 and November 1997 for the 2 boilers Respectively |
| Total | 183.44 |
The Unit completed the supplies of the first and second boiler in January 1999 and May 1999 respectively. These were commissioned in January 2000 and November 1999 respectively. For the delay in handing over the units, the customer levied liquidated damages (LD) amounting to Rs.18.34 crore on the engineering as well as equipment supply in terms of clause-6 of LOI and the Unit also provided the same in the accounts. Apart from LD, it incurred a loss of Rs.29.64 crore as against the estimated loss of Rs.43 lakh.
One of the elements contributing to the loss was the excise duty (ED) paid on the system engineering and design engineering contract. Despite the advice of the accounts wing to include ED on engineering and design charges as they formed part of the value of the materials being supplied, the Company signed a separate contract for these services without the element of ED. In the event, the Company paid ED, amounting to Rs.1.89 crore but, when it claimed the same from the GIPCL, the latter did not reimburse it because it was not part of the contracted price.
Management stated (July 2002) that while estimating the charges for engineering, it had provided for taxes at 20 per cent on the total value of design and engineering services contract. It claimed that it made a profit of Rs.47 lakh even after paying ED of Rs.1.89 crore.
The reply of Management is not tenable as there is nothing on record to suggest that the Company had consciously provided 20 per cent towards excise duty in the price of design and engineering services. If it did, the question of claiming it again from the customer over and above the price would not arise. Further as for overall profit on the contract, there would be a loss of Rs.1.18 crore instead of profit after considering the LD as withheld by the customer.
Irrespective of the profit made, the fact remains that the Company lost Rs.1.89 crore by not including a clause on ED in the contract even though it was aware that the ED was payable on engineering and design services.
The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).
The Company failed to place the order for procurement of imported material timely and consequently hand over the same in time to the subcontractor for fabrication of dished ends which resulted in an unfruitful expenditure of Rs.1.77 crore.
M/s. Indian Oil Corporation Limited (IOCL) through their consultant M/s. Balmer Lawrie and Company Limited placed (August 1998) an order on the Company for design manufacture, supply and errection of three 150 MT LPG/Propane Bullets along with accessories for their bottling plant at Malda, at a price of Rs.2.23 crore including taxes, duties and transportation. The order was to be executed by Trichy Unit of the Company within a period of 10 months from the date of letter of intent (LOI) i.e. by 24 June 1999. The contract was subject to levy of liquidated damages @ 1per cent per week of delayed delivery with a maximum of 10 per cent of the contract value.
Trichy Unit accordingly issued (November 1998) a LOI to M/s. Thysson, Germany for supply of 218 MT of B.Q. Plates (Boiler Quality Plates) required for fabrication of shell and dished ends at a cost of US$ 0.110 million (Rs.46.58 lakh). Due to persistent pressure from the customer, the Unit placed another order (March 1999) indigenously on M/s. Shah Bros and Company, for supply of 29 MT of B.Q.Plates at a cost of Rs.9.67 lakh. Supplies from both the suppliers were received in April 1999.
The fabrication of dished ends, being the critical item in manufacture of the Bullets was being outsourced. The Unit offloaded (November 1998) this job to a new source, viz., M/s. KRR Engineering Private Limited. Chennai with a delivery schedule of 60 days from the date of issue of material by the Unit. The Unit, however, issued the material to the sub-contractor in September 1999.
M/s. KRR Engineering Private Limited carried out the fabrication of dished ends at their sister concern. These dished ends, on inspection were rejected (December 1999) on account of not conforming to the required thickness. The consultant approved delivery extensions from time to time up to December 1999 with a final deadline of 7 March 2000 for completion of supplies.
The Unit, however, could not adhere to the deadlines communicated by the customer’s consultant and bullets were not supplied even by the extended due date ie.7 March 2000 because of some hurdles faced at the production shop. The customer’s consultant finally cancelled the contract (March 2000) at the entire risk and cost of BHEL. The Unit, however, incurred an expenditure of Rs.1.77 crore in manufacturing the above bullets which had become unfruitful.
Management, while confirming the facts, stated (December 2001) that they were making efforts to use these bullets for other LPG projects of IOCL/HPCL. Further, though M/s. KRR Engineering Private Limited was a new vendor for subcontracting machining area they were the approved vendors for BHEL. They further added that M/s. KRR Engineering Private Limited was the L1 bidder and hence the order was placed on them.
The above contentions are not tenable as even though KRR Engineering Private Limited might have been an approved vendor and L1, they actually got the work done through their sister concern who was not an approved source and who could not carry out the fabrication to the satisfaction of the customer as a result of which the plates were rejected. Moreover, Management had valued the material as scrap and the Unit was yet to find a customer for this equipment even after 2 years despite it being available off-the-shelf.
In effect, therefore, delays on the part of Management in placing the order for procurement of imported material (2 months) and in handing over the material to the subcontractor for fabrication (4 months) in contravention of the existing guidelines of the Unit for execution of short-term delivery contracts, had ultimately resulted in the Unit’s failure to adhere to the committed delivery schedule of June 1999 and of 7 March 2000 after which the order was ultimately cancelled by the customer. Consequently the expenditure of Rs.1.77 crore incurred in the manufacture of the bullets had been rendered virtually infructuous.
The matter was referred to Ministry in August 2001; their reply was awaited (September 2002).
Injudicious decision of the Company to establish Closed Die Forging Shop without assessing the economic viability resulted in an infructuous expenditure of Rs.1.53 crore.
The Company set up a Closed Die Forging Shop (CDFS) at Central Foundry Forge Plant, Hardwar in 1993-94 at a cost of Rs.3.12 crore for production of closed die forgings. The feasibility report prepared for the CDFS had, inter alia, envisaged the annual production of 207 MT forgings valued at Rs.3.44 crore for captive consumption (i.e. average rate of Rs.166 per Kg). The actual production was, however, much lower than the projected since inception as indicated below:
| Year | Production | ||
| Quantity (MT) |
Value (Rs. in lakh) |
Average Rate per Kg. (Rs.) |
|
| 1994-95 | 126.64 | 43.00 | 33.95 |
| 1995-96 | 3.00 | 1.60 | 53.33 |
| 1996-97 onwards | Nil | Nil | - |
Although the feasibility report had envisaged the availability of adequate orders from sister units at an average rate of Rs.166 per Kg, the orders at such price were not available for captive consumption. The Company, therefore, explored the outside market and could receive only a few orders during the period 1994 to 1996 at a very low rate (average rate of Rs.34 per Kg).
As such, there was huge variation in the cost of production as compared to available market rates, rendering the operation of the CDFS unviable since beginning. This indicated that the Company had not assessed the techno-economic viability of the CDFS in the feasibility report in terms of the cost effectiveness. As a result, the CDFS had not been operated since 1995-96.
While the building constructed for the project at a cost of Rs.1.19 crore was being utlilised as a store and some of the equipment shifted to the other units, the Company could not make alternative use of plant and machinery worth Rs.1.53 crore. Provision for loss towards cost of the idle plant and machinery had been charged in the accounts for the year 1999-2000.
Management contended (July 2002) that the forgings to be manufactured by the CDFS were only for captive consumption and did not need any market survey. They also stated that due to change in technology in the intervening period, it was not worthwhile to pursue this project and possibility of utilising the equipment was being explored.
The reply is not tenable as the Company could not obtain orders either from its units or from the market at the envisaged rates. Further, the plea of change in technology in the intervening period is also not tenable as the orders were executed at unworkable rates since beginning, which rendered the operation of CDFS unviable ab initio. The Company also could not make any alternative use of the equipment for more than five years.
Thus, the injudicious decision of the Company to establish the CDFS without properly assessing its economic viability resulted in an infructuous expenditure of Rs.1.53 crore.
The matter was referred to Ministry in April 2002; their reply was awaited (September 2002).
The Company’s estimated cost for manufacture of the pressure vessel proved to be unrealistic resulting in loss of Rs.99.12 lakh against an estimated profit of Rs.5.38 lakh.
Gas Authority of India Limited placed (January 1995) an order on the Company for supply of one Teflon-coated pressure vessel (Separator) for a price of Rs.48.28 lakh to be delivered at site by January 1996. The Trichy Unit of the Company manufactured and supplied the equipment in October 1997 at a total cost of Rs.1.43 crore, thus, incurring a loss of Rs.99.12 lakh, including a cash loss of Rs.51.19 lakh, against an estimated profit of Rs.5.38 lakh. The main reasons for the loss were:
(a) Wrong estimation of quantity and cost of raw material: Against an estimated direct material cost of Rs.18.07 lakh, the actual cost incurred was Rs.48.28 lakh (an increase of 167 per cent). The Unit was to indigenously procure the dished end and reinforcement pad of 22 mm thickness at a cost of Rs.3.88 lakh. However, during detailed analysis, the Unit found it necessary to increase the thickness of dished end and reinforcement pad. In view of the enhanced requirements, it resorted to import of these at a cost of Rs.24.86 lakh.
(b) Underestimation of cost of Teflon coating: The Teflon coating of the inside surface of the pressure vessel was outsourced to AMI Polymers. The actual cost for this turned out to be Rs.31.94 lakh, nearly four times the estimate of Rs.8.50 lakh due to incorrect assessment of the quantum of work that was required and also the facilities required for doing it.
(c) Increase in direct labour cost: There was an increase of nearly five times in labour costs. Against estimated direct labour hours of 1924 for the total job inside the factory, the actual labour hours were 10081.
(d) High transportation cost: The cost of transportation was also grossly underestimated. Against Rs.0.75 lakh for transportation built into the price, the actual transportation cost was Rs.6.65 lakh. The dimensions of the vessel called for separate budgetary quotation for transportation before estimation, which was not carried out.
(e) Liquidated damages due to delay: As against scheduled dates of April 1995 and September 1995 for ordering and receipt of materials from the suppliers, the Unit placed orders up to August 1995 and received them only between February-May 1996 resulting in slippages in delivery date of equipment. This attracted the liquidated damages of Rs.4.75 lakh, which had not been recovered by the customer.
Ministry, while confirming the above observations of the Audit, stated (June 2002) that it referred the matter to the Board Level Audit Committee (BLAC) of the Company for investigation. The BLAC, after considering the whole facts of the case, were of the opinion that the Company had no option but to complete the order in the given situation but cautioned the Unit to be more careful in future while dealing with proprietary sub-vendors. It also advised that contract prices with proprietary sub vendors should be finalised only after efforts were made for obtaining written clearance from the customer to meet sub vendor’s price.
Essentially, therefore, the unrealistic estimation of the costs involved in the manufacture of the pressure vessel had resulted in a loss of Rs.99.12 lakh including a cash loss of Rs.51.19 lakh in the execution of a contract. This is a pointer to the casual manner in which estimates are framed.
The Company took 48 month to install the power factor correction equipment resulting in payment of avoidable surcharge of current consumption charges bill of Rs.70.47 lakh.
The Heavy Power Equipment Plant (Unit) of the Company at Hyderabad draws power for its plant and township from Transmission Corporation of Andhra Pradesh Limited (APTRANSCO). In terms of Clause-6 of the Tariff Notification and APTRANSCO letter dated 24 February 1998, every consumer has to maintain a power factor of not less than 0.90 during any month. In order to maintain the power factor at 0.90, the consumer is required to install HT/LT capacitor banks at various load centres. If the power factor falls below 0.90 during any month, the consumer has to pay a surcharge @ 1 to 3 per cent of current consumption charges bill depending upon low power factor range below 0.75 to 0.90 from consumption month of June 1998 onwards.
During the period June 1998 to March 2002, the power factor recorded for township service connection ranged between 0.81 to 0.87. As the readings were lower than the norm of 0.90, APTRANSCO levied surcharge in the bills from time to time, which amounted to Rs.70.47 lakh. APTRANSCO rejected (July 2000) the Unit’s request to waive the surcharge stating that this being uniform for all customers could not be waived in case of an individual customer. The Unit paid Rs.22.14 lakh towards power factor surcharge for the period from June 2001 to March 2002 and also made a provision for the balance of Rs.48.33 lakh in the accounts for 2001-02.
The Unit finally installed the capacitors costing Rs.4.52 lakh in March 2002. The power factor recorded for the billing month March-April 2002 was 0.94 and as such no power factor surcharge was levied. Although aware that maintenance of the power factor at prescribed level of 0.90 could be achieved by installing capacitors, the Unit took 48 months to install them. As a result, it had incurred avoidable expenditure of Rs.70.47 lakh.
Management stated (July 2002) that the Company initially tried to seek waiver of penalty on the grounds of being a bulk consumer. It was only when APTRANSCO rejected its request, action was taken to correct the low power factor. The power factor correction equipment was installed in March 2002 for the township.
Management’s reply is not tenable as there was no reason for the Company to hope that APTRANSCO would make an exception in its case. Moreover, the request was made only in July 2000, 29 months after the issue of notification enhancing the power factor.
Thus, delayed response to change in the power factor resulted in the Company incurring avoidable expenditure of Rs.70.47 lakh towards power factor surcharge.
The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).
The Company started manufacture of equipment on the basis of letter of intent (LOI) placed by client without receipt of firm order, approval of the client to start manufacturing and receipt of advance as per LOI and spent Rs.6.73 crore on equipment which resulted in blocking of capital.
Heavy Engineering Corporation Limited (Company) received a purchase order in October 1999 from Usha Ispat Limited (UIL) for design, engineering, manufacturing and supply of 4 cranes along with other equipment at a total cost of Rs.15.98 crore. The entire equipment was required to be supplied by 31 October 2000. The purchase order further provided that the Company would submit the required drawings and specifications to the client for approval before initiating the manufacturing activity. The terms of payments stipulated in the purchase order were as follows:
The Company started manufacture of the cranes on the basis of letter of intent received in May 1998 without waiting for a firm purchase order and without receipt of advance admissible under the contract. UIL reiterated in February 1999 that the Company should not undertake the manufacturing activities and was to only send the feedback data/drawings/makes of bought out items for their approval until receipt of further clearance from them.
Further, in January 2000, UIL had instructed the Company that they should complete the engineering activity and manufacturing activity should be undertaken only on receipt of specific direction/advice of General Manager (P) of UIL.
The Company, however, proceeded with manufacturing activities and completed the manufacturing of 3 EOT Cranes by March 2000 at a total direct cost of Rs.6.47 crore. The technical specification of the cranes desired in the purchase order could not be met because the Company had manufactured cranes of the design stated in the LOI.
The Company, thus, blocked a sum of Rs.5.82 crore (Rs.6.47 crore minus Rs. 64.85 lakh being the items re-canalised and used in other orders)
Ministry in their reply admitted (November 2001) that the manufacturing of equipment was started keeping in view the delivery schedule of March 1999 as stipulated in the LOI and the Company was continuously pursuing with the customer for issuance of covering purchase order from Industrial Financial Corporation of India and efforts were also being made to locate alternate customer for these items.
Ministry’s reply is not acceptable in view of the fact that the Company did not follow the prudent commercial practice and commenced manufacture of the equipment without getting a firm purchase order, approval of the drawings and confirmation from the customer or receipt of advance. Further, the Company was also aware of the financial position of UIL, as orders placed by them in November 1996 for supply of wagon tippler (in similar conditions), manufactured at a cost of Rs. 90.87 lakh were facing a similar situation. The Company is not sure of finding alternate customers since stores and other parts amounting to Rs. 64.85 lakh had already been re-canalised and used in other supply orders during 2001-2002.
Thus, due to hasty commencement of the manufacturing of equipment without obtaining a firm purchase order, non-drawal of advance as stipulated in letter of intent and non-observance of prudent commercial practices, the Company had blocked Rs.6.73 crore.
The Company by non-adhering to established marketing guidelines and by inadequately supervising the activities of the depot, had to suffer loss due to non-realisation of dues of Rs.3.69 crore from a private party
Hindustan Paper Corporation Limited (Company) appointed (September 1995) M/s Diamond Copy House (DCH), a stockist for sale for its products (writing and printing paper) in Chandigarh. As per terms of appointment, DCH deposited sale advance and bank guarantee of Rs.1 lakh each. In terms of approved marketing guidelines of the Company, the maximum credit limit that could be extended to the stockist was Rs.4 lakh (i.e. twice the value of sales advance and bank guarantee). It was also stipulated that in case three cheques of a stockist bounced in one financial year, the supplies were to be stopped or were to be made only against pay order/demand draft.
However, the Company effected sale to DCH in excess of their credit limit since August 1997 and inspite of repeated bouncing of cheques (26 occasions), supply to the stockist continued until it was finally stopped on 24 March 2000. No criminal action was initiated against DCH for bouncing of their cheques. Neither had any permission for enhancement of credit limit been taken from the Board nor proper records maintained at the depot against supply. As on 31 March 2000, in complete disregard of the marketing guidelines and against all canons of financial prudence, the undue favour shown to the stockist resulted in the value of outstanding supplies reaching Rs.3.25 crore against the permissible limit of Rs.4 lakh.
Management thus clearly acted in a very unprofessional manner against the financial interest of the Company. Management subsequently suspended seven officers (including Executive Director, Marketing) for causing huge loss to the Company and referred the case to CBI (April 2000) for investigation. The CBI has since submitted their final report, action on which is yet to be taken by Management (September 2002).
The Company, belatedly filed suit (November/December 2000) against the stockist and its 72 third parties for Rs.1.38 crore and Rs.2.76 crore respectively.
Management, however, did not initiate legal proceedings against the stockists under 1944 ordinance relating to protection of Government properties, which would have helped to secure the Company’s position in the legal proceedings.
While confirming the facts and figures, Management stated (July 2001) that there were some lapses in respect of two stockists under Northern Regional Office and that it had stopped dealing with the stockists and initiated legal action for recovery besides taking disciplinary action against erring officials.
The contention of Management is confirmation of a lack of proper monitoring mechanism and internal control in as much as they continued to do business with the particular private stockist despite its repeated failure to honour its cheques. The legal proceedings are yet to be completed.
Thus, non-adherence to established marketing guidelines and inadequate supervision of activities of the depot led the Company to non-realisation of dues of Rs.3.69 crore (including Rs.43.56 lakh on account of withdrawal of cash discount and imposition of penalties) from a private party.
The matter was referred to Ministry in July 2002 their reply was awaited (September 2002).
The Company incurred loss of Rs.1.03 crore due to failure to execute the order as per delivery schedule besides blocking of funds of Rs.23.19 lakh.
HMT Limited (Company) entered into (April 1995) an agreement with M/s. 600 Lathes, UK (Licensor) for manufacture and supply of Harrison M 300 Lathes (machines). According to the agreement, the licensor proposed to purchase 1000 machines per annum during the three years from November 1995 to October 1998 subject to satisfactory completion of the initial order for 240 machines. During the year 1995-96 against the selling price of Rs.1.40 lakh, the estimated cost of manufacture was Rs.1.33 lakh per machine. Thus, on execution of the order of 3000 machines the estimated profit would have been Rs.2.10 crore. A formal order for supply of 240 machines valued at Rs.3.96 crore was placed by the licensor in February 1996.
Between November 1996 and August 1999, the Company could, however, supply only 68 machines. The Company incurred a loss of Rs.79.14 lakh on supply of 68 machines as the cost of production ranged from Rs.2.79 lakh to Rs.3.54 lakh per machine. The Company could not meet the requirement of the licensor either in terms of quality of machines manufactured or in adhering to the delivery schedule. Consequently, the licensor issued (November 1999) notice for termination of the agreement. Though the Company requested (November 1999) the licensor to reconsider its decision in view of huge investments already made on the project, the licensor reiterated (December 1999) its stand on termination of the agreement. Ultimately both the licensor and the Company agreed (August 2000) to short close the original agreement.
At the time of termination of the agreement in August 2000, 24 machines valued at Rs.48.55 lakh were held in stock and materials valued at Rs.60.71 lakh were under work in progress/stock. However, the export obligation to the tune of Rs.2.84 crore remained unfulfilled. Consequently, the Company paid Rs.27.50 lakh for customs duty on imported material and interest thereon. The Company was also liable to pay the special import licence premium on unfulfilled export obligations: Rs.12.62 lakh and interest on packing credit: Rs.11.59 lakh. The Company, however, with the permission of the licensor sold 24 machines in India at Rs.76.08 lakh and gained Rs.27.53 lakh.
Management stated (April 2001) that the delay was equally attributable to the licensor due to changes in specifications like paste material, paint material, etc. The high humidity at the manufacturing unit and lack of high quality dedicated precision machines to manufacture components were cited as reasons for lack of consistency and for rework in manufacture.
The reply of Management is not acceptable and is rather an admission of their failure to factor these reasons before entering into agreement since the humidity factor and the lack of dedicated precision machines ought to have been known to the Company. These facts obviously indicated that the Company had not done proper preparatory work before acceptance of the order. Moreover, the interest of the Company was not adequately secured by including appropriate clause relating to post contractual changes in the specifications by the customer.
The outcome of the mismanagement of the agreement by the Company caused it a loss of Rs.1.03 crore and blocking of funds of Rs.23.19 lakh as of July 2002. Equally important, the Company in effect lost a big business deal since if it had executed the order as per agreement (3000 machines) with required parameters, it could have made a profit of Rs.2.10 crore (approx.).
The matter was referred to Ministry in July 2001; their reply was awaited (September 2002).
Injudicious procurement of Continuous Sand Mixer and Sand Reclamation Plant by HMT Machine Tools Limited in October 1998 resulted in wasteful expenditure of Rs.1.23 crore.
HMT Machine Tools Limited (Company) placed (December 1997) an order for procurement of a Continuous Sand Mixer and Sand Reclamation Plant on M/s. Omega Foundry Machinery Limited, UK at a cost of Pound Sterling 86933 (Rs.55.47 lakh) for installation at Machine Tools Division, Bangalore (MTB). The plant was meant to upgrade production technology and produce quality castings in foundry department. The Company obtained budgetary support through equity amounting to Rs.1.10 crore for this project from the Government of India (GOI) between 1995-96 and 1997-98. The project cost was expected to be paid back in 3 years’ time with savings from the operations of the new plant.
The plant, which arrived at Bangalore in October 1998, was not cleared immediately by the Company from the Customs as the planning in respect of Foundries had undergone a change. The Company decided (August 1999) to transfer the plant to Machine Tools Division, Kalamassery (MTK) inter alia with a view to rationalise the foundry operations/investments of the Company. The plant was got cleared from the Customs only in May 2000 and despatched to MTK in June 2000. The total expenditure on the plant inclusive of customs duty and other charges was Rs.1.23 crore (December 2001). The Company had also placed (June 1998) a purchase order for Rs.6.20 lakh for indigenous items besides finalising an order for erection and installation of allied items for Rs.11.91 lakh. The plant was, however, yet to be commissioned at MTK (July 2002).
The guarantee period of the plant too has elapsed without the plant having been commissioned after incurring an expenditure of Rs.1.23 crore. As per the terms of budgetary support, the Company had already furnished utilisation certificate for Rs.80 lakh out of Rs.1.10 crore received from the Government, but the fact of non-commissioning and non-utilisation of the plant up to July 2002 had not been communicated to the GOI.
Management stated (June 2002) that subsequent to the placement of the import order, there was a thinking to close down MTB foundry and hence the plant was diverted to MTK foundry and that the plant could not be commissioned due to severe liquidity crunch. It further stated that the plant was expected to be commissioned by the end of July 2002 and also assured that they would be alert in project implementation in future.
The reply of Management only confirms the Audit observation that the purchase of the expensive machine by availing Government equity and by utilising scarce foreign exchange was injudicious as it could not be commissioned even after almost 4 years of its procurement. The transfer of the plant to MTK was an afterthought. The plant had not been commissioned at MTK so far (July 2002).
Thus, procurement of Continuous Sand Mixer and Sand Reclamation Plant resulted in injudicious expenditure of Rs.1.23 crore, besides blocking up of scarce capital and foreign exchange. As the equipment is no longer under supplier guarantee, there is no assurance regarding proper functioning of the plant even after installation and commissioning.
The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).
Manufacture of machines in anticipation of order resulted in loss of Rs.62.63 lakh.
The Company submitted a quotation in December 1998 to M/s. Maruti Udyog Limited, Gurgaon (customer) for an enquiry received in November 1998 for supply of two special purpose machines (Rs.2.01 crore) and modifications to already supplied machines (Rs.32.26 lakh). Based on negotiations, revised quotation was submitted in March 1999 indicating Rs.1.49 crore for new machines and Rs.19.80 lakh for reconditioning of existing machines with customer. However, even without receiving the order, the Company took up (26 March 1999) the manufacture of four machines (2 new and modification of already supplied 2 machines) and incurred an expenditure of Rs.69.34 lakh up to the end of March 1999. The customer informed (29 March 1999) the Company that subject to approval of their Management, purchase order/letter of intent would be placed by mid-April 1999. It was only in October 1999 that the Company ascertained from the customer that orders for one new machine and reconditioning at reduced scale for two old machines would materialise due to change in process at the customer’s end. Accordingly, orders for one new machine (Rs.86.94 lakh) and reconditioning for two machines (Rs.0.60 lakh) were received (January 2000) at a total value of Rs. 87.54 lakh and these were supplied/modified in September 2000.
As the orders had not materialised as expected, the Company ended up with work-in-progress (WIP) of Rs.49.74 lakh for new machine and Rs.12.89 lakh for modifications as on March 2001. As these were special-purpose machines and reconditioning materials were procured/processed for specific purpose, no alternate customer could be found. Hence the Company made (March 2001) a provision of Rs.62.63 lakh for these machines/materials lying in WIP which had become obsolete. No cancellation charges could be claimed from customer as no order was received.
Management stated (June 2002) that the manufacture of these machines was undertaken based on a letter received from the customer during March 1999. The decision to manufacture the machines in anticipation of a clear and confirmed order from the customer was taken up keeping in view the tight delivery schedule indicated in the tender enquiry. The order book position of the Hyderabad Unit which undertook the job was not good and surplus capacities were available.
The reply is not tenable as customer’s letter of March 1999 was a conditional one and was not even a letter of intent. At the end of 31 March 1999, Hyderabad Unit had confirmed orders for 31 other machines valued Rs.24.98 crore pending execution which could have been executed to utilise the surplus capacity instead of taking up the manufacture in anticipation of orders.
Thus, manufacture of machines in anticipation of order has resulted in loss of Rs.62.63 lakh.
The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).
The Company made irregular payment of Rs.85.69 lakh towards encashment of half pay leave to employees retired under voluntary retirement scheme in contravention of DPE guidelines and without approval of the Government of India.
As per the Department of Public Enterprises (DPE) guidelines, the terminal benefits available to an employee who seeks voluntary retirement do not include the encashment of half pay leave (HPL).
Instrumentation Limited (Company) re-introduced (February 1996) their voluntary retirement scheme (VRS) with the additional benefit of allowing encashment of HPL balances in the account of its employees on the date of their voluntary retirement, subject to a maximum limit of 240 days of commuted leave. The Board of Directors of the Company accorded (March 1996) ex post facto approval to the scheme but desired that the matter relating to encashment of HPL be referred to the Government of India (GOI) for approval. Accordingly, a reference was made (May 1996) to the GOI, which rejected (September 1996) the proposal stating that it was not covered by the model VRS approved by DPE. The Company again took up (November 1996) the matter with the GOI for re-consideration but there was no response (May 2002).
Audit scrutiny revealed that the Company had made payment of Rs.85.69 lakh to its employees towards encashment of HPL during the period 1996-97 to 2000-2001 without the approval of the Government, in contravention of DPE guidelines.
Management stated (June 2002) that it considered to provide some reasonably possible benefits in VRS to motivate the employees. The reply is not tenable as the fact remains that the payment was made in violation of DPE guidelines and was therefore, irregular.
The matter was referred to Ministry in June 2002; their reply was awaited (September 2002).