CHAPTER 8
MINISTRY OF DEFENCE

Bharat Dynamics Limited

8.1.1    Import of material nearing expiry of its shelf life resulting in loss of Rs.86.48 lakh

Bharat Dynamics Limited (Company) entered (February 1998) into a contract with Euro-Missile GIE of France (EM) for export of 1000 nos. each of the Milan missile launch tubes, pistons, and convergents at a total price of FF 6.60 million (equivalent to Rs.4.24 crore). The above products were to be manufactured from components kits to be supplied by EM. The said kits included some material with limited shelf life. The contract was to come into force only after its acceptance by the French Government. On receipt of the French Government’s approval in July 1998, the Company applied (August 1998) to Ministry of Defence for export permission, which was received on 2 December 1998. The Company applied for the import duty exemption licence in December 1998 and received the import licence on 18 June 1999.

The customer made ready the kits including those with limited shelf life in November 1998 as per contractual time clause. However, the Company could clear their dispatch only in June 1999 after receiving the import licence from the Director General of Foreign Trade (DGFT). The Company received the kits in July/August 1999 by which time the shelf life of 406 kg of Stratipreg (the main ingredient) had already expired and the shelf life of another 2292 kg of Stratipreg was to expire in a matter of few weeks. The Company utilised 945.5 kg out of 2292 kg of Stratipreg for production of 386 launch tubes. However, these launch tubes produced at a cost of Rs.1.01 crore failed during tensile tests. The shelf life of remaining quantity of Stratipreg (1346.5 kg) and other material viz., Isorob (35 kg) procured at a cost of Rs.1.27 crore expired before they could be used. The Company took up the matter for free replacement of shelf life expired materials with EM between December 1999 and March 2001. EM settled the matter by paying Rs.40.56 lakh as compensation.

The Company sought Board’s approval in May 2001 for writing off of Rs.1.87 crore (Rs.1.01 crore incurred on the production of 386 launch tubes and Rs.1.27 crore towards the shelf life expired materials less Rs.40.56 lakh received from EM as compensation). The Board ordered (May 2001) a detailed investigation and sought a report fixing the responsibility before the proposed write-off could be considered. The Board of Directors had, however, approved (June 2001) the write-off of Rs.1.87 crore in the accounts for 2000-01 without any investigation and its report thereon which was to be submitted to it. Besides an amount of Rs.1.65 crore spent on manufacture of pistons and convergents is lying in work in process/finished stock.

Since the contract hinged on timely deliveries and involved material with fixed shelf life, the Company should have sought the contract to become effective only upon receipt of licences from MOD and DGFT on the lines of provision making the contract effective upon receipt of French Government’s approval. Omitting to take cognizance of this basic fact resulted in a loss of Rs.1.87 crore besides idle investment in work in process/finished stock of Rs.1.65 crore.

Management stated (November 2001) that delay in obtaining import licence was inevitable as it involved various procedures and that they were planning to export the finished goods by procuring indigenous raw material at a cost of Rs.89.51 lakh. Management further stated (July 2002) that linking despatch of materials by EM to the receipt of licences was not feasible because if it had insisted on such conditions it would not be able to make any export business. It further stated that it could reduce the total loss to Rs.86.48 lakh by delivering the launch tubes, which were rejected by EM, to the Army after subjecting them to re-qualification trials by System Quality Assurance Establishment. The matter regarding compensation for remaining life expired material was taken up with EM and the latter agreed to compensate by paying higher price for warheads to be supplied by the Company.

Firstly, the Company’s contention that it could not have insisted on a clause synchronizing despatch of materials with receipt of import licence is not correct as such a clause has been included in the subsequent contracts with EM. Secondly, the Company has not fulfilled the export obligation till date (August 2002). If it meets this obligation by using indigenously procured material, it would not be eligible for deemed export benefits. In the event, it is not known what purpose such a course of action would serve. Finally, there is nothing on record to show that the increase in price of warheads was agreed by EM in order to compensate the Company in any way.

Thus, by not synchronizing the despatch of raw materials (whose shelf life was limited) with the receipt of relevant licences from the Indian authorities, the Company incurred avoidable expenditure of Rs.1.87 crore which was finally written off. After the sale of some of the rejected launch tubes to the Indian Army by conducting re-qualification tests, the Company had still incurred a loss of Rs.86.48 lakh. Besides, investment in work in pocess/finished stock worth Rs.1.65 crore was lying idle.

The matter was referred to Ministry in July 2002; their reply was awaited (September 2002).

Bharat Earth Movers Limited

8.2.1    Extra expenditure in implementation of voluntary retirement scheme

Bharat Earth Movers Limited (Company) introduced (May 1992) a voluntary retirement scheme (VRS) for its employees on the basis of guidelines issued by the Department of Public Enterprises in October 1988. The DPE guidelines defined emoluments as pay plus dearness allowance (DA). However, according to the VRS of the Company, the employees were entitled to an ex gratia payment equivalent to one and half month’s emoluments, i.e. pay plus DA and personal pay drawn at the time of retirement, for each completed year of service or service left before the normal date of retirement, whichever was less. Moreover, the Company had reckoned 26 days as one month instead of 30 days. The Company’s VRS had the ex post facto approval of the Administrative Ministry in September 1992. Vignyan Industries Limited, a subsidiary of the Company, also adopted VRS on the lines of the Company.

Thus, inclusion of inadmissible elements and inflating the monthly emoluments by the Company and its subsidiary resulted in excess payment of Rs.13.52 crore under the VRS for the period 1992-93 to 2001-02.

Management stated (September 1999) that family planning incentive was included for calculation as this was being included for benefits like deputation pay, gratuity, provident fund, house rent allowance etc.

Ministry stated (November 2001) that DPE’s instructions of October 1988 did not seem to be in order with regard to definition of pay and action of the Company to include personal pay in calculating ex gratia appeared to be in order.

The reply is not tenable as:

1. The final authority to interpret DPE’s guidelines is DPE itself and not the administrative Ministry;
2. The DPE had earlier clarified (May 1992) that emoluments for the purpose of VRS shall consist of basic pay and DA only;
3. DPE re-iterated (October 2001) that taking into account personal pay including family planning incentive while computation of ex gratia to employees was not correct; and
4. Month means a calender month and is not to be reckoned as 26 days.

Thus, inclusion of inadmissible items as part of ‘emoluments’ for the payment of ex gratia under VRS resulted in an extra expenditure of Rs.13.52 crore. (Company: Rs.13.35 crore and subsidiary Rs.17 lakh) from 1992-93 to 2001-02.

Bharat Electronics Limited

8.3.1    Irregular accountal of sales

Irregular accountal of sales by changing records resulted in premature payment of sales tax and income tax and consequential loss of interest of Rs.3.66 crore.

According to Company’s accounting policy 2 (i), the sales are recognised when the saleable goods are unconditionally appropriated to the sale contract.

On verification of sales transactions of Bangalore Complex of the Company for 1999-2000 and 2000-2001, Audit noted that the Company had invoiced the sales 3 to 5 months in advance and had changed despatch documents to advance the date of accounting of sales to conform to its accounting policy on the recognition of sales.

The Company had, thus, advanced the accountal of annual sales of Rs.88.32 crore in the year 1999-2000 and Rs.56.10 crore in the year 2000-2001 instead of in the years 2000-2001 and 2001-2002 respectively. This resulted in blocking of funds due to preponement of tax liability towards income tax amounting to Rs.21.96 crore in 1999-2000 and Rs.6.08 crore in 2000-2001 and resultant loss of interest of Rs.3.39 crore. Premature accountal of sales also resulted in blocking of working capital due to advancement of monthly payments toward sales tax liability and resultant loss of interest of Rs.26.82 lakh.

Ministry while reiterating the reply of Management stated (May 2002) that:

1. sales were recognised in accordance with the Accounting Standard 9 and accounting policy 2(i) which provided for setting up of sales when the goods were unconditionally appropriated to the sales contract after customer’s prior inspection; and
2. as the recognition of the sales was in order consequent payment of sales tax and income tax could not be avoided hence the arriving of notional loss of interest by Audit was not appropriate.

At the time of accountal of sales, the goods had not been handed over to the carrier for delivery to the buyer.

The reply of Ministry is not acceptable because the goods could not be said to have been unconditionally appropriated as significant risk in the goods remained with the Company at the time of accountal of sales. Moreover, the interest loss pointed out on account of preponement of tax liability is not notional as the Company had paid an interest of Rs.21 crore during 2000-02 on account of borrowings to meet its working capital requirements.

Thus, irregular accountal of sales by changing sales records resulted in premature payment of sales tax and income tax and consequent loss of interest of Rs.3.66 crore.

Hindustan Aeronautics Limited

8.4.1    Loss due to non-realisation of royalty

Indian Airlines Limited (IA) had been operating ground handling services at the Company’s aerodrome at Bangalore since 1991. The Gazette notification of June 1984 notified that all airlines/agencies rendering ground handling services at airports to other airlines were liable to pay a percentage of their gross turnover of ground handling charges as royalty to Airports Authority of India (AAI) or the owners of the airport. However, subsequent to the notification, Hindustan Areonautics Limited (Company) did not prefer any claim on IA with regard to such royalty.

Representatives of the Company and IA met on 2 July 1998 to discuss the payment of royalty by IA towards ground handling services extended to other airlines, but the meeting was inconclusive regarding the rate of royalty to be charged. The Company in June 1999 referred the payment of royalty to Ministry of Civil Aviation, which instructed (August 1999) the Company to consider the issue of charging royalty at 5 per cent since AAI had adopted (December 1997) this rate on an ad hoc basis with effect from 1 January 1998.

The Company, however, preferred a claim for Rs.1.48 crore being the royalty charges for the period January 1997 (instead of January 1998) to October 1999 on IA in March 2000.

The Company and IA met once again on 8 July 2000 to sort out the issue of payment of royalty. In the proceedings, IA stated that in the past it had not collected the charges to be paid as royalty from various operators and they would not be in a position to settle the past dues. IA further agreed that the royalty would be paid to the Company from 1 July 2000 onwards. IA firmly denied (January 2001) the claim of the Company for the prior period and paid royalty only from July 2000 at 5 per cent.

However, the Company preferred a revised claim of royalty on IA in March 2001 for Rs.1.52 crore @ 5 per cent for the period from January 1997 to June 2000 as against a claim of Rs.92.46 lakh for the period from January 1998 to June 2000 as per decision of Ministry of Civil Aviation.

Management stated (May 2001) that:

1. the Gazette notification of 1984 had come to its notice only in 1997;
2. charging of royalty @ 5 per cent was agreed provisionally, until a final decision was taken by Ministry of Civil Aviation in this regard; and
3. the plea of IA for denial of past dues was not agreed to.

Ministry confirmed (June 2001) the views/comments of Management.

The reply is not tenable as failure to keep abreast of latest rulings and to prefer periodical claims in time resulted in non-realisation of royalty.

Thus, failure of the Company to claim royalty from IA on ground handling charges collected at Company’s aerodrome by preferring timely periodical claims resulted in a loss of Rs.92.46 lakh from January 1998 to June 2000.