For the Year Ended March 2014
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Report of the Comptroller and Auditor General of India on Dual Freight Policy for Transportation of Iron Ore Traffic in Indian Railways for the year ended March 2014 Laid in Lok Sabha/ Rajya Sabha on _______________ Union Government (Railways) No.14 of 2015 (Performance Audit) TABLE OF CONTENTS Paragraph Pages PREFACE iv EXECUTIVE SUMMARY v-xi CHAPTER 1 –INTRODUCTION Dual Freight Policy 1.1 1 Types of Iron Ore 1.2 2 Freight Operation Information System (FOIS) 1.3 2 Organisational Structure of staff responsible for working 1.4 2 of Dual Freight Policy with regard to Iron Ore Audit Coverage 1.5 3 Audit Objectives 1.6 4 Audit Criteria 1.7 4 Audit Scope 1.8 4 Sample size 1.9 5 Audit Methodology 1.10 6 Acknowledgement 1.11 6 Sample - Loading points Statement A 7 Sample - Unloading points Statement B 8 CHAPTER 2 – A: IRREGULAR BOOKING AND DELIVERY OF ‘IRON ORE’ AT DOMESTIC CONSUMPTION RATE AND RESULTS THEREOF B: UTILISATION OF IRON ORE NOT CONSUMED DOMESTICALLY C: ALLOCATION AND ALLOTMENT OF RAKES FOR IRON ORE TRANSPORT Customers eligible for Domestic Rate 2.1 9 Freight rates applicable to iron ore traffic 2.2 9 Documents required to be submitted for availing freight 2.3 10 rate for domestic consumption Consequences of non submission/ partial submission of 2.4 10 documents and of submission of false /inaccurate misleading Documents/ Indemnity Notes Irregularities in booking of Iron ore 2.5 11 Non submission of documents at loading points 2.5.1 12 Partial submission of documents at loading points 2.5.2 13 Submission of invalid, inaccurate, false documents at 2.5.3 14 loading points Imposition of Penalty 2.5.4 15 i Non submission/partial submission of documents at 2.6.1 16 unloading points Non-submission/partial submission of documents by 2.7 17 SAIL Iron ore transported availing freight at ‘domestic 2.8 18 consumption’ rate but not used for domestic consumption Short Reporting and non use of iron ore transported by 2.8.1 18 Rail at domestic rate at manufacturing unit Wide variations in percentage of removal of iron ore 2.8.2 19 fines Assessment, allocation and allotment of rakes for Iron 2.9 21 ore traffic Deficiencies in rake allocation and allotment 2.9.1 23 Deficiencies in Rake Allotment System (RAS) 2.9.2 24 Details of non submission, partial submission or deficient Statement C 26 submission of documents by the Consignees, which also short reported iron ore in Excise Returns Statement showing the details of customers to whom Statement D 28 rakes were allotted in excess of requirement Statement showing company-wise number of rakes Statement E 29 allotted through RAS by manual intervention CHAPTER 3 – INTERNAL CONTROLS FOR EFFECTIVE IMPLEMENTATION OF POLICY, MONITORING AND REPORTING Deficiencies in internal control for effective 3.1 30 implementation of policy Training 3.2 31 Monitoring and Reporting 3.3 32 Appreciation Notes 3.3.1 32 Inspections by Commercial Inspectors and Travelling 3.3.2 34 Inspectors of Accounts Inspections by Commercial Inspectors 3.3.2.1 34 Inspections by Travelling Inspectors of Account 3.3.2.2 35 System Improvement Suggested by Vigilance 3.4.1 36 Department of IR and status of follow up action Issue of show cause/demand notice to the parties and 3.4.2 37 position of court cases Conclusion 3.5 38 Statement showing instances where iron ore used, sold Statement F 39 etc. depicted in Annual Accounts are at variance with the position reported in Excise Return ii Statement showing name of the parties having more than Statement G 40 one code in Freight Operation Information System CHAPTER 4 - CONCLUSION & RECOMMENDATION Conclusion 4.1 41 Recommendation 4.2 42 Annexure I-VIII 43 iii PREFACE This Report has been prepared for submission to the President of India under Article 151 of Constitution of India. This Report contains the Audit observations arising from the study of the Working of Dual Freight Policy in Indian Railways with regard to transportation of Iron Ore Traffic. The Report emanates from the scrutiny of files and documents pertaining to Ministry of Railways, Zonal and Divisional Railway Offices, loading and unloading points and the office of Executive Director, Rail Movement, Railway Board Office at Kolkata. Besides, Excise Returns submitted by companies transporting Iron Ore, as supplied by Central Excise Department, as well as Annual Accounts of the companies provided by Department of Company Affairs were examined. Audit has been conducted in conformity with the Auditing Standards issued by the Comptroller and Auditor General of India. Audit wishes to acknowledge the cooperation received from Ministry of Railways at each stage of the audit process. iv EXECUTIVE SUMMARY 1. Background Iron ore is an important commodity transported by Indian Railway (IR). A considerable share of total Iron ore consumed in India and exported from India is transported by IR. It is loaded mainly from 97 loading points over seven Zonal Railways1. In IR, rate for charging freight for a commodity is decided on the basis of Goods Classification wherein a class is assigned to each commodity. The freight rate applicable to that class is charged for all commodities included in that particular class. Taking into account the socio-economic and commercial factors2, IR also specifies, for the same distance and quantity, higher and lower rates for transport of same or various forms of a particular commodity. With regard to Iron ore IR introduced with effect from 22 May 2008 the Dual Freight Policy (DFP) as per which transportation of Iron ore was categorized in two categories viz. for ‘domestic consumption’ and 'other than domestic consumption’. The above classes covered various types of Iron ore3. The DFP in effect led to freight difference between the above two classes, which was on an average more than three times. The primary objectives of the DFP were to lower the cost of transport of Iron ore for domestic producers and to keep freight charges for export of iron ore in sync with its rising international spot market prices and garner high freight revenues in the event of increase in international price of Iron ore. The allotment of rakes for Iron ore transportation is governed by an allotment policy, assigning priority/preferences laid down by Railway Board and have a bearing on the implementation of the DFP. Manufacturers of Iron and Steel, Cement and Pellets are the authorised customers eligible for booking ‘Iron ore’ at domestic rate as per the Rate Circulars issued by Railway Board subject to laid down terms and conditions. 1 South Eastern Railway (SER), East Coast Railway (ECoR), South Western Railway (SWR), West Central Railway (WCR), Southern Railway (SR), South East Central Railway (SECR) and Western Railway (WR) 2 Indian Railway Conference Association Goods Tariff Part I (Volume II) 3 iron ore lumps, iron ore fines, calibrated iron ore, iron ore pellets etc. v 2. Highlights of the Report Audit examined records of 83 major loading points (out of 97 loading points) of seven4 Zonal Railways and of 180 unloading points (out of 198 unloading points) of 15 Zonal Railways. The Audit Report highlights the deficiencies in compliance with laid down rules and procedures in booking and delivery of Iron ore at domestic rate by concerned Railway officials that resulted in a financial loss of expected Goods earnings to the extent of ` 29236.78 crore (freight evasion of `12722.65 crore and non-imposition of penalty to the tune of`11418.16 crore due to partial submission/non-submission of documents/submission of invalid documents besides imposable penalty of `5095.97 crore for diversion for trading the iron ore transported at domestic rate). Audit studied the rules framed by IR under the DFP to ensure that these were adequate for effective implementation of the policy and well considered. The effectiveness of checks and balances put in place for correct implementation of the DFP through monitoring, reporting and control were also examined. The Report comprises of four chapters. The issues dealt in these chapters are as under - Chapter I - Background of the Dual Freight Policy, statistical information on the transportation of Iron ore in India, Audit scope, Audit Objectives, Audit Criteria and Audit Methodology and Sample Size. Chapter II - Irregular booking and delivery of Iron Ore at ‘Domestic Consumption Rate’ and results, utilisation of Iron ore not consumed domestically besides allocation and allotment of rakes for Iron ore transportation. Chapter III - Internal Controls for effective implementation of Policy, Training, Monitoring and Reporting. Chapter IV - Audit Conclusion and Audit Recommendations 3. Major Audit Findings 3.1 Evasion of freight or non-imposition of penalty due to Irregular allowing of concessional rate 4 Loading points for Iron ore exist on seven Zones only. vi Railways accepted indents of 225 consignees without obtaining prescribed documents from them and allotted & booked ‘Iron ore’ in 2079 rakes charging freight at domestic rates. This led to freight evasion of ` 957.74 crore during the period from May 2008 to September 2013. (Paragraph 2.5.1) Acceptance of partial documents from 218 consignees and allowing booking of ‘Iron ore’ charging freight at domestic rates by Railway in respect of 5083 rakes, led to freight evasion of ` 957.76 crore during the period from May 2008 to September 2013. (Paragraph 2.5.2) Forty nine consignees submitted invalid documents for availing the benefit of charging freight at ‘domestic consumption’ rate. The booking of 190 rakes resulted in freight evasion of ` 108.42 crore. (Paragraph 2.5.3) As many as 205 consignees booking 5041 rakes were allowed charging of freight at ‘domestic consumption’ rate though endorsement in the Forwarding Note and the Affidavit submitted were inaccurate and invalid.