CHAPTER 8
MINISTRY OF DEFENCE

Contrary to the approval of the Board of Directors, embarking upon a project for the manufacture of dumpers with engine other than BEML-Komatsu, resulted in blocking up of funds of Rs.1.60 crore and consequential loss of interest of Rs.61.67 lakh.

In order to compete with domestic and international manufacturers, Bharat Earth Movers Limited (BEML) decided to update its dumper technology and conceived (September 1992) a project to develop BH-60 dumper through in-house Research and Development. The Board of Directors (Board) approved (January 1993) a project for development of one prototype of BH-60 dumper estimated to cost Rs. 1.40 crore. The prototype was to be built initially with engine manufactured by Kirloskar Cummins Limited (KCL) and thereafter suitably modified at the design stage for in-house engineering of BEML-Komatsu engine.

As KCL engine was not readily available, BEML developed (November 1995) BH-60 proto with General Motors (GM) engine and sold it in January 1999. In accordance with the approval accorded by the Board, BEML was to modify the proto thereafter to fit in BEML-Komatsu engine.

Since the pay load capacity of BEML-Komatsu engine was more than 60 MT the equipment was classified as BH-70 and a proto of BH-70 dumper with BEML-Komatsu engine was developed (September 1997) and sold in September 2000.

However, even before the proto was developed, contrary to the approval accorded by the Board, BEML planned production of 5 BH-70 dumpers during 1996-97 and imported (May 1997) 5 GM engines at a cost of Rs.63.05 lakh.

BEML utilised (May 1999) one of these engines in the manufacture of BH-60 dumper. The dumper manufactured at a cost of Rs.1.22 crore could not be sold as the customers preferred dumpers fitted with BEML-Komatsu engine and hence this was lying in inventory (June 2001). Meanwhile, BEML sold in March 2001, one GM engine as spares for Rs.14.28 lakh. The remaining three imported GM engines amounting to Rs.37.83 lakh were also lying in inventory since May 1997.

The Management stated (March 2001) that since different customers preferred to have different engines, it was decided to develop 3 protos, the first fitted with GM engine, second with KCL engine and third with BEML-Komatsu engine. The Management further stated that it was decided to import 5 GM engines since it anticipated delay in the development of KCL and BEML-Komatsu engines.

The reply is not tenable as the import of GM engines was contrary to the directive of the Board which desired that the proto be manufactured only with KCL engines. Further, BEML was aware of the fact that the proto developed with GM engines as early as in November 1995 remained unsold even in May 1997 and notwithstanding this it imported 5 GM engines in May 1997.

Thus embarking upon the project for the manufacture of dumpers with engine other than BEML-Komatsu, contrary to the approval of the Board, resulted in blocking up of funds of Rs.1.60 crore and consequential loss of interest of Rs.61.67 lakh (upto June 2001).

The matter was referred to the Ministry in April 2001; their reply was awaited (October 2001).

Bharat Electronics Limited

Incorrect estimation of income and consequential short payment of advance income tax for the years 1997-98 to 1999-2000 by the Company resulted in avoidable expenditure of differential interest of Rs.1.20 crore.

Bharat Electronics Limited (Company) paid advance income tax of Rs.17.73 crore for the year 1994-95 against the tax liability of Rs.3.49 crore resulting in additional interest burden of Rs.50.86 lakh. This was reported in para 6.3.3 of the Report of the Comptroller and Auditor General of India No.3 (Commercial) of 1999. The Ministry stated (May 1998) that the Company had been advised to take corrective steps to avoid recurrence of such excess payments.

A review of records relating to assessment of income tax revealed that the Company paid less advance income tax during all the financial years 1997-98, 1998-99 and 1999-2000. In terms of Section 234 B (1) of the Income Tax Act, 1961 an assessee who has failed to pay the advance tax or, the advance tax paid was less than ninety per cent of the assessed tax, shall be liable to pay simple interest at two per cent (one and half per cent with effect from 1 June 1999) for every month or part thereof on the amount by which the advance income tax paid falls short of the assessed tax. Section 234 C (1) of the Income Tax Act, 1961 also provides for payment of interest by the assessee at one and half per cent per month on the amount of short paid instalments of advance tax for three months.

Accordingly, the Company paid interest of Rs.1.23 crore under Section 234 B (1) and Rs.2.87 crore under Section 234 C (1) of the Income Tax Act, 1961 due to incorrect estimation of income for the financial years 1997-98 to 1999-2000.

The Management stated (April/July 2001) that short payment of advance tax was on account of lower cost of materials consumed than estimated, higher estimated provision for doubtful debts, reckoning wage arrears payable to non-executives, better sales turnover and lower expenditure towards interest than estimated. Short payment of advance tax due to these reasons is not tenable as mere provisions for doubtful debts or wage arrears were not deductible expenditure under the Act ibid and unrealistic estimates could not be the basis for determination of advance tax payable.

A similar case of short payment of advance income tax for the year 1990-91 and payment of interest of Rs.88.93 lakh was reported in para 6.2.2 of the Report of the Comptroller and Auditor General of India No.3 (Commercial) of 1996.

The Company either estimated less or excess income as far as calculations for payment of advance income tax were concerned and ended up generally in paying either interest or had its funds blocked with Income Tax authorities. This is indicative of systemic failure to assess the advance income tax payable.

Thus, incorrect assessment of income and consequential short payment of advance tax from 1997-98 to 1999-2000 resulted in avoidable expenditure of differential interest amounting to Rs.1.20 crore.

The matter was referred to the Ministry in July 2001; their reply was awaited (October 2001).

Bharat Electronics Limited (Company) received 23 orders valued Rs.11.20 crore between July 1994 and December 1995 from the Ministry of Defence (Customer) for supply of spares for a Gun System. The first order of July 1994 allowed the Company to draw 20 per cent of the value of the order as interest free advance. However, the advance attracted interest at market rates beyond the contracted delivery period.

The Company, however, did not draw the advance assuming that any slippage in the delivery would result in double penalty to the Company in the form of liquidated damages and interest on advance at market rates. Also the advance payment clause was deleted from subsequent orders.

Due to this, the Company incurred an avoidable expenditure of Rs.76.77 lakh towards interest on borrowed funds used for procurement of materials in respect of 23 orders.

The Management stated (April 2001) that contrary to general condition of the contract for the supply of spares to the customer, interest on advance clause was inserted and accepting of such stringent payment terms might led to insisting of similar payment terms for other indents also.

The reply is not tenable as the advance was interest free for the contracted delivery period, which was about 3 years. The Company was liable to pay interest on advances drawn at market rate only for delayed supplies which the Company in any case had been paying on its borrowings.

Thus failure on the part of the Company to avail opportunity of interest free advance offered by the Customer resulted in borrowing of funds and resultant avoidable expenditure of Rs.76.77 lakh as interest.

The matter was referred to the Ministry in June 2001; their reply was awaited (October 2001).

Garden Reach Shipbuilders & Engineers Limited

In March 1991, Garden Reach Shipbuilders & Engineers Limited (Company) obtained an order for supply and installation of three 3-MW Diesel Generating (DG) sets to Central Coalfields Limited (CCL) at a total price of Rs.13.38 crore. Between June 1992 and December 1993, the Company procured components for three DG sets, from its foreign collaborator as well as indigenous sources and assembled these in-house at a total cost of Rs.11.64 crore.

However, in view of earlier instances of failure of certain components supplied by GRSE to CCL’s other projects, the latter put an embargo on the supply of DG sets in February 1993. Although the embargo was lifted in May 1996, CCL did not clear any site for installation of the DG sets. The Company then utilised engine-components (valuing Rs.2.16 crore) of two of the three DG sets assembled for CCL and supplied these to two other customers (Reliance Industries Limited and Paradeep Port Trust) during 1996-97.

Thus, the Company was left with balance materials consisting of one complete DG set and two partially-complete ones, originally meant for CCL, amounting to Rs. 9.48 crore. Despite CCL’s persistent reluctance to accept the DG sets as per agreement, the Company decided (July 1999) to procure further engine-components to replenish the incomplete inventory of the two DG sets lying in store at a total cost of Rs. 4.31 crore. However, the DG sets could not be disposed off or utilised in any way till date. In the meanwhile, CCL clearly declined (February 2000) to accept the DG sets on grounds of their improved captive power situation. The Company referred the dispute to arbitration, the proceedings of which were yet to commence (September 2001).

Thus, the import of engine-components by the Company, without ascertaining marketability of the DG sets, resulted in avoidable blocking of fund of Rs.4.31 crore and consequential loss of interest of Rs. 1.10 crore (@ 18 per cent for the period from October 1999 to March 2001).

The Management stated (July 2001) that the decision to import the components was taken after assessing the market potential and to take advantage of price discount (7.5 per cent) available during the collaboration period which was expiring in December 1999. Further, it was scouting for customers among various public sector undertakings.

The fact remains that the Company had not received any order for such engines during the last four years. Therefore, the decision to import engine-components resulted in avoidable blocking of fund of Rs.4.31 crore and consequential loss of interest.

The matter was referred to the Ministry in July 2001; their reply was awaited (October 2001).

Hindustan Aeronautics Limited

Failure of the Company to foresee the implications of US sanctions imposed on military supplies and payment of advance, despite legal opinion/media reports resulted in blocking up of funds of Rs.12.68 crore, loss on interest and bank charges of Rs.1.42 crore.

Hindustan Aeronautics Limited (Company) placed (April 1998) an order on M/s. Light Helicopter Turbine Engine Company Limited (LHTEC), USA, for procurement of 30 engines at a total CIF value of US $ 14.91 million (equivalent to Rs.59.64 crore) to be delivered between December 1998 to July 1999. As per terms the Company was to make an advance payment equal to 20 per cent of the value of the purchase order within 30 days of the seller’s submission of Standby Letter of Credit (SLOC).

In the meantime the Press reported (May 1998) that the sanctions by the US Government would apply to military supplies to India. The Company also obtained (May 1998) a legal opinion in the matter which clearly indicated that:

1. in view of the sanctions there will be no military sales to India;
2. it was not advisable to make any advance payment;
3. the Company could look for alternative suppliers; and
4. rescind the agreement under force majeure clause for not fulfilling the contractual obligations.

In view of the US sanctions other US suppliers also expressed (May/August 1998) their inability to supply the items required by the Helicopter Division of the Company. Ignoring the media reports, legal advice and inability expressed by the other US suppliers, the Company paid (September 1998) an advance of US $ 2.982 million (equivalent to Rs.12.68 crore) on obtaining SLOC. Since the sanctions were not lifted, the Company terminated (July 1999) the agreement and SLOC was encashed (September 1999). The Company placed (July 1999) an order on M/s. Turbomeca, France for supply of 30 engines at a CIF value of Euro $ 11.891 million (equivalent to Rs.59.40 crore).

The Management stated (March 2001) that complete details of US sanctions reported in the media were not officially available and the legal opinion was sought with regard to acceptance or otherwise of SLOC by LHTEC as a backing for the advance payment. The Ministry endorsed (April 2001) the views of the Management. The reply is not tenable as the contents of media reports were confirmed by the other US suppliers by indicating (May/August 1998) their inability to supply other items required by the Helicopter Division of the Company due to restrictions imposed by US Department of Commerce. Moreover the legal advice could have been considered by the Company which clearly warned the Company not to make advance payment and terminate the agreement in view of the sanctions.

Thus, the failure of the Company to foresee the implications of the US sanctions imposed on military supplies and payment of advance despite legal opinion/media reports etc. resulted in blocking up of funds of Rs.12.68 crore and consequent loss of interest / bank charges of Rs.1.42 crore.

According to Section 10 (5) of the Income Tax Act, 1961, the value of any leave travel concession (LTC) shall be exempt from income tax only to the extent of expenses actually incurred for such travel. No exemption can be claimed without performing any journey and incurring actual expenses thereon.

Lucknow, Korwa and Kanpur divisions of Hindustan Aeronautics Limited (Company) under its LTC Rules, from the block year 1982-85, permitted its employees, the encashment of LTC admissible for visiting any place in India in a block of 4 years. The encashment was restricted to 75 per cent of first class rail fare for 4 tickets in the case of certain graded officers and the entitled rail fare for 1500 kilometres each way in the case of workmen on the basis of a certification that the employee/family actually undertook the travel and expenditure incurred was not less than the amount claimed.

The three divisions of the Company disbursed a sum of Rs.6.27 crore (Lucknow Rs.2.91 crore, Korwa Rs.66.04 lakh and Kanpur Rs.2.70 crore) during the five years (April 1994 to March 1999) on account of encashment of LTC. The amounts so paid were also allowed as exemption from income tax on the plea that employees had given a certificate to the effect that the amount of LTC encashment was not less than the expenditure incurred on visit to any place in India by the employee and his family. The plea of the Management was not correct, as the certificate of expenditure incurred should have been supported by documentary proof of journey performed. Accordingly, in response to an Audit objection (April 1999), the Company issued instructions in August 1999 to all its units to make deduction of income tax at source from the amount of LTC encashment paid to employees with effect from 1 April 1999.

The granting of unauthorised exemption of income tax to its employees on account of LTC encashment attracted the provisions of Section 201 (I) and 201(IA) of the Income Tax Act and the principal officer of the Company became the deemed assessee in default for such payment of income tax along with interest @ 15 per cent per annum on the amount of income tax so becoming due. Besides, a penalty equivalent to the amount of income tax to be deducted at source under Section 271 (C) of the Act could also be leviable on the Company. Thus, three units of the Company became liable for an avoidable liability of Rs.3.24 crore towards income tax at minimum slab of 20 per cent without any surcharge (Rs.1.26 crore), interest upto 31 March 2001 (Rs. 73.05 lakh) and penalty (Rs. 1.25 crore) under the above provisions of the Act.

The Management stated (July 2001) that the scheme was introduced to obviate the difficulties faced by the employees in the production of vouchers of the entitled class when they travelled by conducted tours of travel agencies with composite fare. While endorsing the views of the Management, the Ministry further stated (August 2001) that although the scheme was termed ‘encashment’; it was basically a reimbursement scheme.

The reply of the Management/Ministry is not tenable as in the absence of the particulars of the journey undertaken, places visited, date of visit etc., there was not sufficient documentary evidence of expenditure actually incurred for claiming income tax exemption under the Act.

Thus, failure of the Company to deduct income tax at source on payment of Rs.6.27 crore towards LTC encashment to its employees resulted in violation of Section 10 (5) of the Income Tax Act, 1961 and avoidable liability amounting to Rs.3.24 crore towards income tax, interest thereon and penalty under the Income Tax Act.

Failure of the Company to install independent 11 KV network for township and avail benefit of lower tariff resulted in avoidable payment of Rs.1.94 crore from July 1997 to March 2001 besides avoidable payment of Rs.4.30 lakh per month thereafter.

Hindustan Aeronautics Limited (Company) draws power from Karnataka Power Transmission Corporation Limited (KPTCL) at 66 KV with a contract demand of 15 MVA. The power is distributed through a number of 11 KV feeders for both the industrial area and the township as a mixed load of both low tension and high tension and power charges are paid at applicable tariff.

KPTCL introduced on 30 June 1997 a new tariff schedule, which was applicable to residential colonies and residential quarters of industrial/non industrial establishments whether situated within the factory premises or outside. The notification stipulated that in respect of residential colonies availing power supply by tapping the main high tension supply of the industrial/non industrial establishment, the energy consumed by the residential colony was to be billed at a rate which was lower than the prevailing rate.

The Company did not take action to switch over to new tariff and on the omission being pointed out (October 1999) by Audit, the Company took up (February 2000) the matter with KPTCL. KPTCL, after conducting a detailed study of topography of the township and industrial distribution found that power was being tapped by the Company from various feeders of all types of loads and recommended (September 2000), an independent 11 KV network for the township. In the absence of such an independent network it was not possible for KPTCL to install meters to bill the consumption correctly and apply lower tariff regime. However, the Company continued to pay the higher tariff which resulted in avoidable payment of Rs.1.94 crore from July 1997 to March 2001 and recurring avoidable payment of Rs.4.30 lakh per month thereafter due to payment at higher tariff.

The Management stated (April 2001) that switching over from the present system to separate independent feeder network for entire township would result in a monthly loss of Rs.2.11 lakh. Alternatively, setting up of separate sub-stations at various locations to tap electricity directly from KPTCL would result in a monthly loss of Rs.1.30 lakh. Hence there was no technically or commercially viable alternative to bifurcate the township load to avail new lower tariff. The Ministry generally concurred (August 2001) the reply of the Management.

The reply of the Management/Ministry is not tenable as the Company while calculating the loss indicated in the above paragraph had considered (i) 3 months’ minimum deposit (MMD), (ii) Fixed charges, (iii) Capital expenditure, and (iv) Interest, which are not relevant due to the following:

1. the Company would pay 3 MMD on the energy consumed. When separate network is established for township the entire consumption would be bifurcated into industrial and township consumption. Hence even the 3 MMD would also be bifurcated and no extra payment would be involved;
2. likewise even for low tension tariff, fixed charges are applicable and paid by the consumer (in this case recovered from consumers). The 15 MV contact demand is for entire supply and when the system is bifurcated as industrial and township the contact demand is also bifurcated and hence there would be no extra cost on this count either; and
3. capital expenditure and interest- considering the investment cost of independent 11 KV network and payment of power charges at lower rate the Company could still save Rs. 5.72 lakh per month.

Thus failure of the Company to install independent 11 KV network for township and avail benefit of lower tariff schedule resulted in avoidable payment of Rs.1.94 crore from July 1997 to March 2001, besides avoidable payment of Rs.4.30 lakh per month thereafter.

HAL Korwa Division extended undue benefit of Rs.1.21 crore to the employees residing in its township during the period from April 1992 to December 2000 by charging concessional rates for electricity consumption while paying higher charges to UPSEB.

Korwa Division of Hindustan Aeronautics Limited (HAL) approached (February 1990) Uttar Pradesh State Electricity Board (UPSEB) for charging subsidised flat rates from the employees residing in its township as were being charged from general public of Amethi. However, UPSEB did not agree and intimated (March 1990) that flat rate was applicable only to those consumers getting supply as per rural schedule and for urban/other areas where the supply is available continuously; energy charges were applicable at higher rates.

Consequent to a decision of the Division (March 1991) for recovering the electricity charges strictly on the basis of meter reading, the worker's Union filed a writ petition (May 1991) in Allahabad High Court. Subsequently, however, the Union withdrew (September 1991) the court case as the Management agreed to recover electricity charges at concessional rates.

The Management was to recover 50 paise for first 100 units, 75 paise for next 50 units and balance as per actual rate when the rate of UPSEB was 80 paise per unit. Though UPSEB had since revised the tariff many times upto Rs.2.60 in January 1999, however, the Company had not revised the rate of recovery from its employees for the first 150 units.

During the period April 1992 to December 2000, the Division recovered only Rs.1.18 crore from its employees towards electricity charges against the actual purchase of electricity costing Rs.2.39 crore resulting in avoidable extra burden of Rs.1.21 crore.

The Management stated (August 2000) that the Division recovered electricity charges from its employees higher than the rate at which UPSEB recovered electricity charges from the general public in Amethi. Further, as per capita recovery was more than the rates recoverable from the general public in Amethi, the short recovery could not be construed as an avoidable extra burden.

The reply of the Management is not tenable as the facility provided to general public of Amethi is not comparable with facility provided to the employees of the Company. Thus, due to acceptance of unusual demand of the Union and failure to revise the rates for the first 150 units, the Company incurred in avoidable expenditure of Rs.1.21 crore during the period April 1992 to December 2000 and it continues to incur this liability.

The matter was referred to the Ministry in July 2000; their reply was awaited (October 2001).

Mazagon Dock Limited

The Company did not regulate foreign travel claims of its employees in accordance with the instructions of the Department of Public Enterprises resulting in irregular payments aggregating Rs. 65.26 lakh from April 1997 to September 2000.

With a view to bring about economy in expenditure on foreign travel by the officers of Public Sector Undertaking (PSUs) Department of Public Enterprises (DPE) issued instructions in September 1995. According to these instructions, the consolidated amount paid as per the guidelines of the Reserve Bank of India (RBI) to each employee in respect of foreign travel was to cover room rent, taxi charges entertainment, if any, official telephone calls, other contingent expenditure and daily allowance for which the PSU employees were to render account on return from foreign tour for all items other than daily allowance which normally covered food, etc. as per rates approved by the Ministry of External Affairs (MEA) for each country. Further, any surplus was to be refunded to the concerned PSU. It was also envisaged to bring the above guidelines to the notice of all the PSUs for adoption by their Board of Directors.

Mazagon Dock Limited (Company) placed the DPE instruction of September 1995 before the Board of Directors only in March 1996. While adopting the DPE’s instructions, the Company formulated its own guidelines for regulating the bills. These guidelines were in contravention of the DPE instruction as per details given below:

1. submission of vouchers for room rent only covering 40 per cent of the consolidated daily amount as per RBI guidelines or actuals as against submission of vouchers for 100 per cent of the allowance (excepting daily allowance for food) as envisaged in the DPE’s instructions; and
2. in case the officer chose not to produce vouchers for lodging, DA payable was regulated at 80 per cent of the standard rates.

A scrutiny of foreign travels undertaken by officers of the Company from April 1997 to September 2000 revealed that:

1. In 50 cases the Company insisted upon vouchers for room rent covering only 40 per cent of consolidated daily allowance as against the vouchers for the entire allowance (except daily allowance for food) as stipulated in DPE’s instructions of September 1995. Admitting the balance 60 per cent expenditure without supporting documents was against the DPE instructions and led to inadmissible payment of US $ 0.10 million (equivalent to Rs. 40.09 lakh) as compared to the daily rates as laid down by MEA.
2. In 27 cases, during the period from April 1998 to September 2000, the Company had restricted the DA to 80 per cent in cases where the employees stayed in hotel/own arrangement, without insisting for vouchers. This resulted in excess payment of US 0.06 million (equivalent to Rs. 25.17 lakh) as compared to MEA rates for which vouchers should have been insisted on as per DPE guidelines.

The Management stated (November 2000) that:

1. Board of Directors of MDL, while framing the rules for regulation of foreign TA/DA claim of officers had taken into consideration instructions issued by DPE in September 1995 and January 1996 and the rules governing deputation of officers abroad were within the permissible limits promulgated by RBI which were practical and implementable keeping the ultimate objective of foreign travel i.e., commercial nature of seeking new business and following up on current orders to meet the customers requirement.
2. The figures worked out in Audit observations were based on interpretation/assumption of DPE guidelines/circular, which were not in conformity with Company’s rules/procedures applicable for commercial undertaking.

The Management’s reply is not tenable as:

1. The DPE instructions envisaged rendering of accounts on return from tour for the consolidated amount whereas the Company did not insist upon rendering of account supported by vouchers for the period from April 1997 to September 2000 violating DPE instructions.
2. The DPE guidelines were issued especially for PSUs. That these guidelines should have been adopted by the Company after obtaining the approval of its Board of Directors is evident from the fact that the DPE emphasised adoption of the same by the Board of Directors of the PSU in its circular letters of September 1995 and January 1996.

Thus non-compliance of DPE instructions resulted in irregular payment of foreign travel allowance amounting to US $ 0.16 million (equivalent to Rs 65.26 lakh).

The matter was referred to the Ministry in November 2000; their reply was awaited (October 2001).

Mishra Dhatu Nigam Limited

The Company suffered loss of Rs. 1.53 crore in unplanned production of MDN-50 grade steel.

Mishra Dhatu Nigam Limited (Company) secured two orders (February/May 1995) for supply of steel grade 50 (MDN-50) bars from Ordnance Factory, Jabalpur (Customer) as detailed below:

The Company had no previous experience in manufacture of MDN 50 grade alloy steel and needed extensive development efforts to execute the above order. However, the Company took up (1995-96) the production straight away based on its experience in manufacture of low alloy steel (EN-19 grade). The Company produced 39 primary heats of MDN 50 grade alloy steel weighing 190 MTs which were processed further to produce the finished cold drawn bright bars. The jobs of straightening and centre-less grinding of bars were outsourced to sub-contractors. The total expenditure on production of MDN 50 was Rs.1.79 crore.

The Company sought delivery extension of 16 months for the first order i.e. upto October 1996 and supplied 14.981 MTs against the ordered quantity of 20 MTs realising Rs.20.97 lakh. The customer did not accept a further request for extension of delivery period since the material supplied by the Company was hard and not machinable. Besides, the quality and finish of the product was poor. The customer finally short closed the supply order in December 1996. In respect of the second order, even though the Company obtained extension of delivery period by 3 months i.e. upto April 1996, no supplies were made. Hence, the Customer cancelled the order in June 1996. The Company held stock of rejected work in process to the extent of 94.840 MTs of MDN-50 as on 31 March 2001.

In this connection it was observed that the Company accepted the order only on the assumption that their experience in the production of low alloy steel EN-19 grade would help in the production of MDN-50 grade steel. The extent of development effort required for the production of MDN-50 grade steel and the time required was not assessed by the Company prior to acceptance of the orders. As a result, it could not achieve the quality parameters stipulated in the order, nor could it adhere to the contracted delivery schedule. This led to customer dissatisfaction and short closure/cancellation of the orders.

The Management stated (July 2001) that:

1. the Company was aware of the quality and delivery requirements specified by the customer for MDN 50-grade steel. The mechanical properties like hardness and yield stress were found to be very sensitive to minute changes in the parameters of the finishing operations than what was normally observed in similar grades of steel. The problem was accentuated, as the range of mechanical properties specified by the customer was relatively narrow. As a result the technical specifications of the product could not be achieved;
2. considerable amount of time was spent due to unprecedented constraints faced during optimisation of process parameters of post hot rolling stages of manufacture; and
3. the Company was exploring alternative use of this grade, for instance order for Rs.6.32 lakh for production of investment castings using this grade was on hand.

The Management’s contentions are not tenable as:

1. the Company was aware of the stringent quality and delivery requirements specified by the customer before making the offer. The technical specifications of the material required by the customer i.e., GOST-10230 was different from that of EN-19 grade steel i.e. GOST-1050. Despite the difference in specifications, the Company did not consider taking the customer into confidence about developmental efforts required for production of MDN-50, and accordingly, provide for it in the contract;
2. the production of MDN-50 could have been undertaken with test samples for getting the required mechanical properties. The Company could have obtained the customer’s acceptance before starting bulk production or could have restricted its production to the extent of the quantity ordered in the first order; and
3. the Company derated 94.840 MTs of rejected material as a scrap material valuing Rs.5.49 lakh (including the investment castings valued Rs.0.75 lakh yet to be delivered to the customer).

Thus, had the Company recognised the need for extensive development in the production of MDN-50 grade steel and negotiated the contract and planned its production accordingly it could have avoided a loss of Rs.1.53 crore.

The matter was referred to the Ministry in September 2001; their reply was awaited (October 2001).