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Dear Sir,
We have completed our review of Capital Expenditure for Ajanta Pharma Ltd. Our observation and recommendations
which have been discussed with the process owners are attached herewith. This report also incorporates replies received in
response to our draft report dated 13th December, 2016 on the same subject.
We appreciate the co-operation and assistance provided to us during the course of this review. We would be pleased to discuss and
clarify on any aspect of our review procedures or this report with you at your convenience.
Yours faithfully,
Key Statistics 05
Executive Summary 06 - 09
Detailed Observations 10 - 25
Exhibits 26 - 40
Capex budgets and approvals Walkthrough to gain understanding of the current process & the
internal control environment.
Procurement of machinery & services
Receipt of machines & services Sample transactions review and data analysis to validate process
understanding.
Bill passing, payments, advances and EMD
Identify risks inherent to various processes.
Performance guarantees
Test effectiveness of existing controls and identify control /
Capex vendor account reconciliation
efficiency gaps for risk mitigation.
Capitalization process
Discuss and agree on recommendations to address control /
efficiency gaps.
Coverage & Period
The review period was from April to August 2016
Audit Team
Mr. Vikas Agarwal
Observation
Issue
There is need to improve tax planning on taxes applicable for ongoing projects by involving Tax team at the time of project cost assessment and
obtain expert opinion, if required. Review showed following scope for costs optimization or compliances:
Service Tax: For ongoing project at Guwahati, civil contract was allotted to M/s. Bharuka Construction. Company had agreed to supply certain
material to contractor for execution of work, for which no charges were recovered from contractor. Such material consists of TMT bars / cement,
etc. which were supplied free of cost. Under Reverse Charge Mechanism, company is liable to pay service tax on 50% of the portion for such
goods supplied as free. During Oct-15 to Aug-16, Rs.8.57 crores was spend on procurement of TMT and Cement. Considering 50% to be paid by
company, potential service tax liability would be ~Rs.24 lakhs (i.e. Rs.8.57 crores x 5.6% service tax x 50% share). Non-adherence to relevant
provision would attract penalty / interest.
Under composition scheme, Service tax is charged on total amount of contract, where the term total amount refers to sum total of the gross
amount charged for the works contract and the fair market value of all goods and services supplied for execution of the works contract, whether or
not supplied under the same contract or any other contract after deducting amount charged for such goods or services & taxes levied thereon. This
indicates that contractor has to include the fair market value of free issue of materials while calculating service tax payable under works contract.
VAT (Value Added Tax): There is need to assess cost benefit analysis considering tax schemes opted for ongoing project. Independent evaluation
of the above civil contract showed that VAT outflow could be reduced by Rs.12 lakhs under standard deduction scheme against VAT of Rs.29 lakhs
levied under composition scheme (as summarized in subsequent slide). No independent assessment was carried out to identify beneficial scheme.
Currently, there are two options available to a contractor for VAT payment i.e. standard deduction scheme where VAT is payable on balance
portion after availing standard deduction of 25 / 30% under AVAT / MVAT or, composition scheme where VAT @ 5% is payable on total contract
value.
CST or Works Contract: As per CST Act, Form C cannot be issued on building / interior contracts resulting in CST payable @ 15% on such
contracts. Possibility to convert these contracts into works contract where material is being procured on Made to Order basis needs to be explored.
Informed that procurement from M/s Fab-tech Intl. Ltd. is Made to Order (i.e. vendor manufactures the material as per specification provided), still
it has been considered as normal procurement contract on which CST of Rs.27 lakh @ 15% has been paid. Converting this into works contract
would have potentially reduced tax outflow by Rs.9 lakhs VAT @5% and Service Tax @4.94% (as summarized in subsequent slide)
Amount
Particulars
(In Rs. Crores)
Procurement Value 1.81
CST @ 15%(A) 0.27
If Works Contract Is Opted
VAT @5% 0.09
Service Tax @4.94% (A) 0.09
Total Tax outflow (B) 0.18
Potential Saving (A-B) 0.09
Potential service tax liability of Obtain expert opinion on service tax applicability on free material issued for civil works and settle tax
Rs.24 lakhs payable for Guwahati liability accordingly. And, thereafter pass relevant entries for settlement of service tax liability and CENVAT
project. credit applicable.
Additional CST/VAT outflow of Evaluate tax structure beneficial for Make to Order contract before placing orders.
Rs.21 lakhs.
Action Plan
Root Cause SOP will be amended and henceforth all purchase order will be approved by taxation department.
Service tax not paid on free issue of Taxation department clearance will be taken at the time of project planning.
material.
Cost benefit analysis considering various tax schemes will be done by taxation department during approval
Lack of adequate tax planning. of purchase order.
Going forward for Make to Order contract, evaluation will be done to choose the best tax structure i.e.
Works contract or CST.
Person responsible: Mahesh - Manager Projects / Rajesh Patel - VP Projects / Vishal Saraiya - Head
Taxation
Timeline: April 2017
Observation
Issue
Though SOP requires Accounts team to audit competitive bidding purchases, process for single vendor purchases (say above certain value) like
exceptional approval or documenting justification are not defined. Summary of 163 POs of Rs.89.2 crores verified is tabulated in subsequent slides
and discrepancies are given below:
Observed 121 (out of 163) POs of Rs.46.53 crores (i.e. 50% in value of samples reviewed) were placed on single vendor for which justification or
exceptional approval was documented (Exhibit 3). This includes POs of Rs.23.22 crores (56% of Rs.46.53 crores) were made at old POs rate, of
which 16 POs amounting to Rs.4.49 crores were procured at PO rates older than 1 year. (Exhibit 4)
Observed 5 POs of Rs.1.14 crores (1%) where purchases were done considering last POs placed 2-3 years back and price hike of 14 to 66% was
allowed without inviting competitive quotes nor basis / justification for allowing such hike was documented. (Exhibit 5)
In absence of adequate audit by Accounts / Tax team, there could be risk of sub-optimum tax evaluation for such single source purchases.
For some of the purchases, vendor quote comparison shows price variation in the range of more than 100% between vendors (Exhibit 6). Reasons
for such wide variation is not mentioned in the comparison statement. Though L1 vendor is selected, there is a possibility of vendor not understand the
material requirement or vendor selection for quote comparison is not correct considering such rate variation being quite unusual.
In Guwahati, Vitrified tiles were procured from M/s Tej Impex at price inclusive of freight. Purchase costs were higher to the extent of excise duty &
VAT / CST applicable on freight component. Considering such freight would have been shown separately could have reduced tax liability by Rs.1 lakh
(Exhibit 7). Informed vendor did not agree to separate freight cost from basic price, for which documentation was not available. Similarly, VAT was
levied on cement of Rs.1.33 crores procured from M/s Calcom Cement India Limited resulting in costs being higher by Rs.3 lakhs during Apr to Aug-16
(Exhibit 8).
No process is defined to seek Tax team confirmation on taxes considered for POs created, though such PO are sent to Accounts for their review.
Observed PO on M/s Delta Construction was created with VAT @ 8% instead of 5%, leading to potential excess cost of Rs.17 lakhs on PO value
Rs.5.7 crores. Invoices from vendor were yet to be received as on date of review in Oct-16 (Exhibit 9)
Background
As per SOP, Project officer has to send approved comparison sheet to Accounts for audit when Capex sourcing exceeds Rs.5 lakhs & includes
multiple vendors bidding. However, no audit by Accounts is required for capex sourcing less than Rs.5 lakhs or single vendor purchase above Rs.5
lakhs.
Company doesnt have defined policy for penalty Timeline: Not Applicable
clause for delay in delivery of material, Though
generally penalty clause for delayed delivery in
material is in PO, observed 3 POs of Rs.1 crores
issued without penalty clause for delayed delivery
(Exhibit 14)
Action Plan
Material master is being reviewed and the same will be standardized post SAP implementation.
Cost benefit analysis for procurement at CIF or FOB will be evaluated for sample 5-6 project and based on differential & quantum, decision for
obtaining own marine insurance policy will be taken.
Henceforth evaluation for EPCG will not be done, and material will procured under EPCG. Only for material below 1L will not be procured under EPCG
as license cost would be higher.
Post SAP implementation, open PO will be reviewed on quarterly basis.
Person Responsible: Pillai Asst. G.M. Projects / Rao - V.P. Technical
Timeline: April 2017
F.Y. Category Asset ID Description of Asset Date Put to Use Cost Depreciation WDV
2015-16 Laboratory Equipment lab\Lab R&D\00046 Nozzle,Recommended Spares,Tablet Coater,Ptional Feature 30-Sep-15 0.24 0.05 0.20
2015-16 Plant & Machinery P&M\P&M\04044 Hvac Installation Charges 14-Jan-16 0.05 0.00 0.04
2015-16 Plant & Machinery P&M\P&M\04072 Labour Charges For Hvac Instalation 31-Mar-16 0.05 0.00 0.05
2015-16 Plant & Machinery P&M\P&M\03970 Ms Erw Pipes For Fire Fighting System 26-Apr-15 0.04 0.01 0.03
2015-16 Plant & Machinery P&M\ELE\00772 Industrial Cable ,Cu/Pvc Insul Sht 30-Sep-15 0.04 0.01 0.03
2015-16 Office Equipment OFFE\OFER&D\00179 Installation Of Ac 20-May-15 0.04 0.02 0.02
2015-16 Plant & Machinery P&M\ELE\00791 Cable 31-Mar-16 0.02 0.00 0.02
2015-16 Laboratory Equipment lab\Lab R&D\00196 Stainless Steel Standard Weight,Thermo Hygrometer Digital Make,Stop Watch Digital Make: Racer 29-Feb-16 0.02 0.00 0.02
2015-16 Plant & Machinery P&M\P&M\03974 Ms Erw Pipes For Fire Fighting System 29-Apr-15 0.02 0.00 0.02
2015-16 Plant & Machinery P&M\P&M\03972 Ms Erw Pipes For Fire Fighting System 26-Apr-15 0.02 0.00 0.01
2015-16 Plant & Machinery P&M\P&M\03971 Ms Erw Pipes For Fire Fighting System 26-Apr-15 0.02 0.00 0.01
2015-16 Plant & Machinery P&M\ELE\00800 Industrial Cable 1.5Sqmm 31-Mar-16 0.02 0.00 0.01
2015-16 Plant & Machinery P&M\P&M\03977 Ms Erw Pipes For Fire Fighting System 29-Apr-15 0.01 0.00 0.01
2015-16 Plant & Machinery P&M\P&M\03978 Ms Erw Pipes For Fire Fighting System 29-Apr-15 0.01 0.00 0.01
2015-16 Office Equipment OFFE\OFER&D\00234 Low Side Work -Installation Testing & Comissioning Split & Cassate Ac 28-Feb-16 0.01 0.00 0.01
2015-16 Plant & Machinery P&M\P&M\03976 Ms Erw Pipes For Fire Fighting System 29-Apr-15 0.01 0.00 0.01
2015-16 Plant & Machinery P&M\ELE\00766 Smoke Sensor & Cables 30-Sep-15 0.01 0.00 0.01
2016-17 Plant & Machinery P&M\ELE\00803 Industrial Cable 240Sqmm X 3.5 14-Jun-16 0.01 0.00 0.01
2015-16 Plant & Machinery P&M\P&M\03975 Ms Erw Pipes For Fire Fighting System 29-Apr-15 0.01 0.00 0.01
2015-16 Office Equipment OFFE\OFER&D\00235 Circuller Fan Supply & Installation 28-Feb-16 0.01 0.00 0.01
2015-16 Plant & Machinery P&M\PMR&D\01582 Stainless Steel Standard Weigh 18-Apr-15 0.01 0.00 0.01
2015-16 Plant & Machinery P&M\P&M\03979 Ms Erw Pipes For Fire Fighting System 29-Apr-15 0.01 0.00 0.01
2015-16 Laboratory Equipment lab\Lab\00012 Stainless Steel Standard Weight E2 Class 20-Oct-15 0.01 0.00 0.01
2015-16 Laboratory Equipment lab\Lab R&D\00013 Stainless Steel Standard Weight 10-Jun-15 0.01 0.00 0.01
2015-16 Laboratory Equipment lab\Lab R&D\00064 Stainless Steel Standard Weight E2 12-Dec-15 0.01 0.00 0.01
2015-16 Plant & Machinery P&M\P&M\04084 Labour Charges Of Hvac Installation 31-Mar-16 0.01 0.00 0.01
2016-17 Laboratory Equipment lab\Lab\00044 Mettler Toledo Make"Ind235 ,232 Cable For Printer 2-Apr-16 0.01 0.00 0.00
2015-16 Plant & Machinery P&M\ELE\00794 Temp. Sensor Model Pt-100 With Temp. Sensor Cable 3 Core 31-Mar-16 0.00 0.00 0.00
2015-16 Furniture & Fixture F&F\F&F\01785 Steel Office Computer Table Si ,Storwell Cupboard Size: 78"X36 9-Dec-15 0.00 0.00 0.00
2015-16 Office Equipment OFFE\OFER&D\00223 Installation Of Low Side Work 29-Feb-16 0.00 0.00 0.00
2015-16 Plant & Machinery P&M\ELE\00798 Cable Tie 400 Mm X 4.8 Mm ,6 Module Metal Box Make Roma,25 Mm Pvc Pipe Conduit Pipe 31-Mar-16 0.00 0.00 0.00
2015-16 Plant & Machinery P&M\ELE\00798 Cable Tie 400 Mm X 4.8 Mm ,6 Module Metal Box Make Roma,25 Mm Pvc Pipe Conduit Pipe 31-Mar-16 0.00 0.00 0.00
2015-16 Plant & Machinery P&M\ELE\00784 Installation Of Split Ac 21-Oct-15 0.00 0.00 0.00
2015-16 Plant & Machinery P&M\P&M\03973 Ms Erw Pipes For Fire Fighting System 26-Apr-15 0.00 0.00 0.00
2015-16 Plant & Machinery P&M\PMR&D\01623 Level Sensor & Dry Preventer Instalation 8-May-15 0.00 0.00 0.00
2015-16 Plant & Machinery P&M\ELE\00783 Installation Of Split Ac & Fixing Charges 21-Oct-15 0.00 0.00 0.00
2015-16 Plant & Machinery P&M\ELE\00781 Cat 6 Lan Cable, 4 Pair Telephone Cable, 25 Mm Pvc Saddel 21-Oct-15 0.00 0.00 0.00
Total 0.74 0.13 0.61
(Amt in Rs.Crores)
Last Last "%"
Division Current
PO No. PO Date Material Description Vendor Name Purchase Purchase Increase in
Name Cost
Order Date Order Cost LPO Price
KVL PROJECT/20/93 18-May-16 Transmitter Gansons Limited. 19-Feb-08 0.38 0.51 33%
Guwahati PROJ/GHT/20/181 8-Jul-16 Vitrified Tiles Escalade 1St Quality With TcMake Tej Impex Pvt Ltd 13-Jan-15 0.31 0.36 15%
Guwahati PROJ/GHT/20/371 31-Aug-16 Advanced Static Dissipative Sieves For Vibrosifter Pharma Spares Pvt. Ltd. 6-Sep-15 0.04 0.07 66%
KVL PROJECT/20/290 27-Jul-16 Digital Metal Detection System. Acg-Pam Pharma Technologies Pvt. Ltd. 15-Oct-13 0.04 0.04 14%
PROJ/GHT/20/111 Effluent Treatment Plant Cap:100Kld Guwahati 0.52 Wte Infra Projects Pvt Ltd 2 0.52 1.07 NA 106% NA
Architecture, Landscape, Mep &
PROJECT/20/1 KVL 1.29 Niteen Parulekar Architects Pvt Ltd 3 1.48 2.99 4.08 102% 176%
Structure Service
PROJECT/20/116 Contour Survey KVL 0.02 Zenith 2 0.02 0.03 NA 55% NA
PROJECT/20/353 Label Designing Software KVL 0.25 Sundaram Technologies 2 0.25 0.39 NA 56% NA
PROJECT/R&D77/20/178 Civil Work R&D 77 0.25 Shreyas Industries 2 0.18 0.25 NA 39% NA
Passive Rock Anchor Work Under
PROJECT/R&D/20/101 Advent 0.09 Kgn Prestress Pvt Ltd 2 0.09 0.12 NA 29% NA
Ground Tank, Car Lift Depth 8M
PROJECT/R&D113/20/10 Civil Work R&D 113 0.01 Private India 2 0.01 0.01 NA 28% NA
PROJECT/R&D77/20/78 Beaker R&D 77 0.04 Mettler-Toledo India Private Limited 2 0.05 0.06 NA 26% NA
Coolingcabinet-1000 Liter.Temp-Range-
PROJECT/R&D113/20/29 R&D 113 0.02 Mack Pharmatech Pvt. Ltd. 3 0.02 0.02 0.04 14% 108%
2 Deg To 8 Deg C
Painting Work, Phase-I (Admin & Qc
PROJ/GHT/20/342 Guwahati 0.26 Private India 3 0.26 0.29 0.44 10% 67%
Building , Solvent, Utility Building)
Total 2.94
Amount
Particulars
(Rs. Crores)
Sr.
Particulars Amount
No.
Amount
Particulars
(In Rs. Crores)
(Amt in Rs.Crores)
Earthworks and Hard Stone Soling 2.08 1.92 2.31 1.92 1.82 27%
RCC Form Work and Steel 9.64 9.11 8.47 8.47 8.32 2%
Mansory and Platering Work 1.21 1.48 1.68 1.21 1.18 43%
Sanitary, plumbing and water supply 0.46 0.65 0.49 0.46 0.39 26%
Road and Storm water line 13.60 9.53 10.42 9.53 7.12 46%
(No. of Vendors)
"%" to
Sr. No. Particulars HO Advent R&D 24 R&D 77 R&D 102 Total
Total
1 Reconciliation done 15 14 16 9 20 74 12%
3 Opening bal. 0 0 1 0 2 3 0%
(Amt in Rs.)
PO Payment Advance
PO No. PO Date Material Description Vendor Name
Amount Terms Given
PROJECT/GHT/20/69 23-May-16 Ind780(P)-3 Scale Nso. Mettler-Toledo India Private Limited 4,865,629 20% advance 973,126
Total 1.99
Scheduled PO
PO No. PO Date Material Description Vendor Name
Delivery Amount (Rs. Cr.)
PROJ/GHT/20/69 23-May-16 Ind780(P)-3 Scale Nso. Mettler-Toledo India Private Limited 31-Aug-16 0.49
Total 1.00