On 31 May, a customs tribunal in Mumbai rejected an investigation conducted by the Directorate of Revenue Intelligence (DRI) – the investigative wing of the Central Board of Excise and Customs (renamed as the Central Board of Indirect Taxes and Customs) in the Department of Revenue in the government of India’s Union Finance Ministry – into one of a number of instances of alleged over-invoicing of coal imported from Indonesia for use in power plants. The case before a Mumbai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) concerned a Delhi-based company named Knowledge Infrastructure Systems Private Limited (KISPL). The company – which was contracted to supply coal to thermal power stations run by the Maharashtra State Power Generation Company Limited in Bhusawal and Chandrapur– has been accused by the DRI through a 41-page show cause notice (SCN) issued on 31 August 2016 of having inflated the price of coal that it imported from Indonesia by routing the invoices relating to the transactions through intermediaries based in Hong Kong and marking up the quality and price of the coal through these invoices.
The accusation had been upheld and penalties imposed by the DRI’s adjudicating authority K V S Singh in an order issued on 23 December 2016. This order has now been set aside by the CESTAT. Certain crucial prongs of the DRI investigation that established the claim of over-invoicing – which are common to most of the other over-invoicing cases – were rejected by the tribunal, in what has come as a major blow to the larger investigation by the agency into a group of private and public sector companies in the country’s power sector.
The DRI investigation, which started in 2009 and is continuing, involves some of the biggest names in India’s power sector, including companies owned by private corporate players such as Gautam Adani’s Adani group, the Ruia family’s Essar group, Anil Ambani’s Reliance ADA group, Sajjan Jindal’s JSW Steel, the Hyderabad based NSL Group promoted by M Venkataramaiah and M Prabhakar Rao, India Cements headed by N Srinivasan as well as major public sector companies such as NTPC Limited (formerly National Thermal Power Corporation Limited), MMTC Limited (formerly Metals and Minerals Trading Corporation Limited), Tamil Nadu Electricity Board and Karnataka Power Corporation Limited.
The DRI has alleged that over-invoicing of imported coal and power-plant equipment cumulatively amounted to around ₹50,000 crore. The agency has claimed that this amount has been siphoned off by the companies by presenting false invoices issued by intermediaries located in tax havens with marked-up prices at the time of import. The coal imports accounted for approximately ₹29,000 crore of this amount, while power-plant equipment imports and “compensatory tariffs” claimed by a few companies on account of a rise in the cost of Indonesian coal accounted for the rest, that is, around ₹21,000 crore.
The CESTAT ruling is the second such case of over-invoicing in which the DRI has tasted defeat – following the order issued on 22 August 2017 where Singh, acting again as DRI’s adjudicating authority, let off two companies in the Adani group which had been accused in a SCN issued by the DRI of siphoning ₹3,974 crore through over-invoicing of power-plant equipment. In an appeal, the DRI has described this order as “erroneous, illegal and improper not only in law but also on facts.” Aside from this case, two other SCNs issued by the DRI have alleged over-invoicing by another Adani group company to the tune of ₹1,526 crore on imports of equipment for power transmission, and by companies in the Essar group to the tune of ₹2,601 crore on equipment for power generation projects, which are yet to be adjudicated.
This author has been following and reporting on the fate of the over-invoicing investigations since March 2016 when the DRI issued a general alert to customs offices across the country highlighting the modus operandi of how coal imports were overvalued, and has noted how the investigation has constantly been shadowed by the suggestion that it is not being pursued with full seriousness by the revenue authorities in the Finance Ministry. The latest CESTAT ruling serves to strengthen this suspicion when certain aspects of the ruling (as shall subsequently be described) are considered along with concerns regarding the conduct of the tribunal that had arisen during the course of proceedings which were reported in a previous article. The present juncture is an opportune moment to take stock of the fate of various strands of this investigation, which is also the subject of a public interest litigation (PIL) in the Delhi High Court seeking the creation of a Special Investigation Team (SIT) to take over the investigation.
The first glimpse that the public got of the likelihood of a massive scam in coal imports for electricity generation was on 14 December 2014 when it was reported that the DRI had conducted search-and-seizure raids at over 80 locations across the country, in the premises of shipping companies, intermediaries and laboratories, in search of evidence indicating the true value of coal imported from Indonesia. The imported coal, which was for use in thermal power stations across the country to generate electricity, was being overvalued to the extent of up to twice its actual value and the difference was allegedly being pocketed by the importers. At that time, the Times of India quoted an unnamed DRI official stating that “almost every importer, including reputed corporates, indulged in overvaluation of coal imports.”
Even at that early stage, the contours of the DRI’s case were clear. To quote from the Times of India’s report:
‘The modus operandi adopted by the companies is that while coal imports would be directly shipped from Indonesia, the invoices will be routed through an intermediary based either in Hong Kong, Singapore, or Dubai. “The inflated amount will be sent to the intermediary who, in turn, would remit the actual value to the Indonesian supplier. The overvalued component would be diverted to tax havens,” the source said.
‘The intermediary is either related to the importer or handles such operations on commission basis, sources said.
‘(The) DRI has found that the companies did not avail of the Preferential Trade Agreement that extended concessional duties for imports from Indonesia. Steam coal imported from Indonesia attracts zero rate of duty and the companies are required to produce country of origin certificate issued by the supplier. “The companies did not avail of this facility because in such a scenario, the companies would have to produce the certificate which would carry the real value,” the source added.’
The DRI’s raids and the agency’s subsequent investigations began to show their effects in March 2016, when it sent a circular to customs offices across the country issuing a “general alert” on coal imports from Indonesia by 40 companies. According to the circular, the companies were engaged in what it called “trade based money laundering” wherein coal was shipped directly from Indonesian ports to India but supplier’s invoices were “routed through one or more intermediary invoicing agents based in a third country...and artificially inflated its landing value.” “The inflated invoices received in India were found to have been issued by intermediary invoicing agents based in Singapore, Dubai, Hong Kong, British Virgin Islands etc. These intermediary firms appear to be either subsidiary companies of Indian importers or their front companies,” the circular added.
The circular elaborated that the “true” export value of Indonesian coal could be found out by examining a document titled “Form A-I” which importers could submit in order to avail a duty exemption that was available to them under the terms of a free trade agreement signed by India with Indonesia and a number of other countries. However, the circular claimed that in some cases, importers avoided claiming the duty exemption so as to avoid submitting the form at the time of import, whereas others submitted photocopies with portions “masked/obliterated” so that customs officials at the port of import did not find out the true value of the coal.
Most significantly, the DRI unearthed documents relating to the imports which had not been submitted to the customs authorities. The agency found two layers of contracts – between Indonesian suppliers and the intermediary companies or subsidiaries of Indian companies, and between the intermediaries/subsidiaries and the Indian importers, which specified different qualities of coal to be supplied and accordingly, had different price points. Additionally, the circular alleged that in a “significant number of cases” the DRI had unearthed two sets of test reports created by two different sets of testing agencies – whereby the quality of coal (which is measured in terms of GCV or “gross calorific value”) had been inflated from one report to the other, and the reports with inflated values had been submitted to Indian customs authorities. The two sets of test reports were said to be aligned with the specifications laid down in the two layers of contracts separating the Indonesian supplier and the Indian importer.
In a parallel investigation, which had started prior to the coal import investigations, the DRI had also found a similar practice of over-invoicing in imports of power-plant equipment by firms in two major corporate groups – the Adani group and the Essar group. Two SCNs which were issued to Adani group companies on 15 May 2014, a day before the results of the 2014 general elections were declared, alleged over-valuation of equipment intended for use in power plants that the companies had set up in Maharashtra and Rajasthan and in a power transmission line in Maharashtra. Together, the two notices alleged over-valuation to the tune of ₹5,500 crore. On 11 March 2015 another SCN was slapped on companies in the Essar group also alleging over-valuation to the tune of ₹2,601 crore of equipment imported for use in power plants in Madhya Pradesh and Gujarat, a crude oil refinery in Gujarat and a fertilizer plant in West Bengal.
It will be useful at this stage to understand the legal framework under which the DRI’s investigation and enforcement processes in such cases operates. The DRI is the investigative wing of the Central Board of Indirect Taxes and Customs (earlier the Central Board of Excise and Customs) in the Finance Ministry, and its primary function is to investigate and act against those who have violated provisions of the Customs Act, 1962. Such violations include the smuggling of prohibited goods, irregularities in payment of duty or mis-declarations related to the assessment of duty. It is under these provisions that over-invoicing is understood as a false declaration of value, and thus a grounds for penal action.
Under Section 111(m) of the Act, a misdeclaration of value makes the imported goods liable for confiscation. Once an appropriately-appointed adjudicating authority is convinced that there is reasonable doubt in the value of imported goods as declared by the importer, he has the power to reject that value and replace it with a value that he determines in accordance with the Customs Valuation Rules, 2007, and also to impose penalties as prescribed under the Act.
It is in this sequence of rejection of declared value that an SCN is issued to the importer, explaining the reasons for the rejection and seeking the importer’s responses as to why the declared value is the correct value and why it should not be rejected and replaced. The adjudicating authority then, based on the evidence adduced in the SCN and the importer’s responses, determines whether the declared value is to be accepted or not, and if it is rejected, then what the actual value of the imported goods is, and what penalties are appropriate.
Significantly, the DRI is only concerned with the customs and the valuation aspects of an import transaction. So, while the SCNs do allege “money laundering” and “siphoning of money into tax havens” and “front companies,” these are not issues that the customs adjudicating authority can go into beyond their relevance to the declared value before customs authorities. This is because questions and allegations relating to money laundering are handled by another investigating agency in the Finance Ministry, the Enforcement Directorate, which is the agency responsible for enforcing the Prevention of Money Laundering Act, 2002 and the Foreign Exchange Management Act, 1999.
Additionally, any questions or allegations of fraud, conspiracy or other potential criminal allegations are to be handled by the police, at the first level, and if so directed, by the Central Bureau of Investigation (CBI). Thus, as per bureaucratic procedures, when the DRI unearthed evidence pointing to the possibilities of over-invoicing and trade-based money laundering, the evidence was handed over to the respective agencies for action.
The first act of the Narendra Modi government after it came to power in late May 2014, was to set up an SIT to investigate black money, which included senior officials from each of the different investigation agencies – this was repeatedly tom-tommed by the Prime Minister. Specifically, the equipment over-invoicing cases came under the ambit of the SIT, as reported by Josy Joseph in his book A Feast of Vultures (HarperCollins, 2016). He quoted a senior Enforcement Directorate official in the SIT as stating that “it is a watertight case” and suggesting that “if the Adani case reaches its logical conclusion, the group will have to pay a fine of around ₹15,000 crore.”
Alongside the SIT’s investigations, the Adani case was also handed over to the CBI for investigation. In July 2014, according to the Indian Express the CBI registered a preliminary enquiry against unnamed Adani group officials and public sector bank officials relating to the equipment over-invoicing cases. Within a year, however, suggestions began to emerge that there was an effort underway to scuttle the investigations in the high-profile Adani cases. A senior DRI official who was handling the investigations was shunted out of his post in October 2015.
Soon afterwards, in the middle of 2016, it emerged that the DRI was facing hurdles in investigating the allegations related to coal imports. In a report published in India Today, it was revealed that officials in public-sector banks like the State Bank of India and Bank of Baroda had refused to submit to the DRI documents from their overseas branches in Singapore and Dubai, citing banking secrecy laws in the respective countries, despite direct requests from the then Revenue Secretary Hasmukh Adhia. In a subsequent report, a DRI official was quoted as saying that ‘it looks like an “invisible outside hand”’ is interfering in the investigation. The official suggested that the DRI was willing to take official action against the concerned bank officials.
Meanwhile, the DRI also issued Letters Rogatory to courts in Singapore and other countries, requesting their assistance in recovering the required documents from the respective banks and companies within their jurisdictions. However, the Indian Express reported in August 2017 that in at least one instance, a company in the Adani group had moved a Singapore court in an attempt to block the release of information via the Letter Rogatory route. This revelation surfaced just days after the order by the customs adjudicating authority was issued which let off the Adani group companies in one of the equipment import cases.
It was after these events that a PIL was filed in the Delhi High Court by Common Cause and the Centre for Public Interest Litigation – two Delhi based non-government organisations – seeking the formation of an SIT to look into all the allegations of over-invoicing in the power sector, both of coal and of equipment imports. (Disclaimer: this writer is a member of the governing council of Common Cause.)
Further details came out during the course of hearings on the petition. Most significantly, it was revealed that the CBI had closed its investigation into the Adani group companies just a year after it had started looking into the case, on what was arguably rather flimsy grounds of jurisdiction. The CBI claimed that since the case concerned a project by the Maharashtra government, it required the state government’s permission to investigate, which it had not received, and thus was forced to close down the enquiry. This stood in sharp contrast to the CBI’s investigation into the allegations against Knowledge Infrastructure Systems Private Limited (KISPL), which also concerned a Maharashtra government company, and which was proceeding without any issues of jurisdiction being raised.
The latest CESTAT ruling however, weakens the case against KISPL. Meanwhile, nothing further has been heard about the status of the investigations by the SIT on black money as far as the over invoicing cases are concerned.
To understand the specificities of the CESTAT order on the KISPL case, one may first look at the evidence unearthed by the DRI to establish the claim that KISPL had over-valued the coal that it imported from Indonesia. To summarise, KISPL had submitted to customs authorities invoices that it had been issued by two Hong Kong based entities – Spring Traders Limited (STL), and Rescom Mineral Trading Limited – at the time of import, stating that those firms were the suppliers from whom it had bought the coal.
The DRI investigation concerned itself with six specific shipments, which, according to the invoices submitted by KISPL, amounted to a total invoice value of ₹112,23,21,671 for a total quantity of 3,36,487 metric tonnes of coal. Along with those invoices KISPL also submitted Certificates of Sampling and Analysis (COSA) indicating the quality of the coal in terms of its Gross Calorific Value (or GCV, a parameter used to measure the heating capacity or quality of coal) – which in each case was stated to be within the range between 4,400 kilocalories per kilogram (Kcal/kg) and 4,800 Kcal/kg, which was the designated quality of coal that KISPL was supposed to supply to its buyer, the Maharashtra State Power Generation Company.
The DRI, however, unearthed another set of “equivalent documents,” which appeared to be about the same six shipments of coal, but which allegedly indicated that the coal was actually of a lower quality and thus, a lower price. These documents were a set of invoices issued by a Switzerland-headquartered company named IMR Metallurgical Resources and a set of COSA reports pertaining to those shipments. It appeared that IMR had sold six shipments of Indonesian coal to a Singapore based subsidiary of KISPL – named Knowledge International Strategic Systems Private Limited (KISSPL). These shipments and invoices concerned the same six ships and of the same quantities of coal. However, the COSA reports showed the coal to be of lower quality, in a GCV range 3,600-3,900 Kcal/kg. According to those invoices, the total amount paid by KISSPL to IMR was ₹92,28,57,471 for the same quantity of coal.
The DRI claimed that these shipments of coal were the same shipments that KISPL had received, and that it had been sold the coal by KISSPL, with STL and Rescom having been used as intermediary invoicing agents, and alleged that the set of COSA reports with higher GCV values were incorrect. Thus, the DRI claimed, the quality of the imported coal had been artificially marked-up and accordingly, the price too had been marked-up, through the intermediary set of invoices and COSA reports.
Crucially, some of the Bills of Lading carried by the six ships, which specified the parameters of the coal being shipped, as well as the names of the shipper at the Indonesian end and the receiver at the Indian end, showed the shipper as IMR, and the “parties to be notified” at the Indian end as KISPL and the intermediary firms as STL and Rescom. The centrality of the Bills of Lading in connecting the two sets of transactions was pointed out by the adjudicating authority in his order upholding the charges against KISPL:
‘The Bill of Lading (BL) details are the key to the identity of the said consignments. They not only reveal the shipper but also the consignee, the vessel’s name, date of sailing, quantity of the goods and the port of discharge. Copies of the said BLs have been submitted to the Customs by the Noticee [KISPL] at the time of import of the consignments. The invoices submitted by them bear the details of the said BLs. The fact that the name of M/s IMR Metallurgical Resources AG, Switzerland had been shown as the shipper, corroborates and validates the contract between M/s IMR Metallurgical Resources AG, Switzerland and M/s Knowledge International Strategy Systems Pte. Ltd., Singapore.
‘The mention of identical BL details on the invoices issued by IMR and the invoices submitted by the Noticee confirms the fact that the shipments which had been imported by them were the very same shipments which had been contracted by their subsidiary from M/s IMR Metallurgical Resources AG, Switzerland under the M/s IMR Metallurgical Resources AG, Switzerland - M/s Knowledge International Strategy Systems Pte. Ltd., Singapore contracts. As such, the said BLs directly link M/s IMR Metallurgical Resources AG, Switzerland - M/s Knowledge International Strategy Systems Pte. Ltd., Singapore, transaction to the present case.’
Based on this evidence, the DRI concluded, and the adjudicating authority concurred, that the first set of documents submitted to customs by KISPL at the time of import constituted a mis-declaration of the value of the goods. The true transaction value was represented by the amount paid by KISSPL to IMR, offset by a reasonable rate of profit – which the DRI determined to be 3.5% by examining an unrelated coal transaction by KISPL, where it had sold a shipment of coal which it had bought from IMR to another buyer in a “high seas sale.”
This valuation was determined based on the Customs Valuation Rules (CVR) 2007, which specifies how the value of a particular item is to be determined when its declared value at the time of import is rejected by customs authorities. These rules specify a strict sequence of steps to follow – first the cost of equivalent imports of the same product from the same country is to be considered, then the cost of the imported product is to be “computed” based on the cost of inputs and applicable processing costs, and then finally if all these methods are unviable, the value is to be determined “using reasonable means consistent with the principles and general provisions of CVR 2007 and on the basis of data available in India.”
The DRI rejected the possibility of using the value of coal imported from Indonesia by other buyers and sellers, since all coal imports from Indonesia were under the scanner and suspected to be over-invoiced, and thus determined the value based on the final rule.
In its ruling, the CESTAT has essentially thrown out the second set of documents unearthed by the DRI. The CESTAT bench has come to the conclusion that the DRI has been unable to prove that the second set of documents are indeed about the same six consignments of coal.
First, the CESTAT bench goes along with KISPL’s defence in pointing out that the documents pertaining to the transactions between IMR and KISSPL were received by the DRI from IMR itself, and did not carry a seal of authenticity. The defence wanted the documents to not be considered at all, arguing that this fact violated the rules of evidence, and thus invalidated those documents. That the CESTAT bench did not accept this, and did consider them as evidence, however, could impugn their credibility. In doing so though, the CESTAT bench ignored entirely the Bills of Lading which the DRI produced, and which were admittedly submitted to the customs authorities at the time of import by KISPL itself. These Bills of Lading, as has already been pointed out, clearly listed IMR as the shipper, and established at least some kind of link between IMR’s coal supply and the coal received by KISPL.
Second, the CESTAT bench has claimed that the CVR were incorrectly applied, and that the DRI and the adjudicating authority’s rejection of contemporaneous coal imports from Indonesia as they are also under suspicion of over-invoicing, is unjustified as it amounts to rejecting all those other coal imports without jurisdiction.
Third, the CESTAT bench has suggested that there are “gaps” in the investigation and that the DRI should have sought to investigate the testing agencies in Indonesia which issued the COSA reports, as well as the intermediaries in Hong Kong.
Thus the CESTAT bench has invalidated the basis for rejecting the declared value of the coal imports and stated that the value stated by KISPL must be accepted. There is one crucial issue that struck this author while going through the CESTAT’s order. To reject the value declared at the time of import, customs authorities – in this case the adjudicating authority – must show “reasonable doubt” of the veracity of that stated value. Does the name of IMR as the shipper of the coal on the bills of lading submitted by KISPL, and subsequently, the documents that IMR has presented claiming that it sold coal to KISSPL and not KISPL, not, together, constitute grounds for reasonable doubt? This is an issue that the order has curiously not gone into at all.
A source in the Ministry of Finance told this writer on condition of anonymity that the DRI will appeal the CESTAT order.
Meanwhile, through the Letters Rogatory sent to courts in Singapore, the DRI is in the process of attempting to uncover further evidence regarding the transactions from Singapore based banks. If indeed KISSPL did buy the coal from IMR, it would have done so on the strength of letters of credit issued by Singapore based banks, and documents pertaining to the transactions should be forthcoming, to strengthen the allegation that the coal sold by IMR to KISSPL was artificially marked-up and sold to KISPL through the Hong Kong intermediaries.
The source confirmed to this author that further notices will be issued based on information received from Singapore as and when it comes through.
The case may also have ramifications on the PIL in the Delhi High Court. According to the records of the case on the Delhi High Court’s website, Mukul Rohatgi – India’s former Attorney General and KISPL’s lead counsel in this case – appeared before the court during a hearing on the PIL which took place on 4 July 2018, seeking to make an intervention in the PIL and place the CESTAT order on the record.
However, as this author had earlier reported, there was bad blood between the DRI and the CESTAT bench that cropped up during the course of this hearing. The CESTAT’s order points to this fact as well, claiming in paragraph 18 of the order that “regretfully, the several hearings...would not go down as a model of harmony in the courtroom and [were] certainly noteworthy for lack of that decorousness expected in appellate proceedings.”
The order went on to, in detail, explain the circumstances of the discord during the proceedings in paragraphs 18, 19 and 20, which confirm much of the substance of this author’s previous report on this case. A copy of the order, which was obtained from the CESTAT’s website is appended to this article, for the reader’s easy reference.
In the light of this order, however, the demand for the formation of an SIT assumes additional significance. Our investigative agencies, housed as they are in different sections of the government, tend to function in separate silos with their own methods and pace of functioning. It is conceivable that on the same broad issue, the CBI, the DRI and the ED may come up with completely different findings, and result in unrelated court proceedings which look at different segments of the cases, without the remit or jurisdiction to examine the broad canvas of the issue, ultimately producing gaps for wrong-doers to slip through.
Interestingly, another source who wished to remain anonymous claimed to this author that money earned through over-invoicing and parked abroad had already been pressed into other projects by one of the companies involved. This too should conceivably form a part of the investigations, something that none of the agencies involved have considered as yet, at least according to public knowledge. An SIT with a broad mandate would be the perfect vehicle to holistically consider the subject. Ultimately, the claim that the DRI and others have made, is that a total sum of money amounting to as much as ₹50,000 crore has been looted from the public at large through electricity bills inflated because of over-invoiced inputs. Such a serious set of allegations cannot – and must not – be allowed to dissolve and disappear into legal quicksand. What is required is political will to investigate and penalise. And as some of us have been asking for the past two years, does that political will exist at all?
Meanwhile, in a related development that could bolster the contentions of the DRI, a recent report of the Comptroller and Auditor General (CAG) of India has alleged that a state government-owned power utility in Tamil Nadu paid ₹813.68 crore more than it should have for lower grade coal between 2012 and 2016. The CAG report, tabled in the state assembly, has recommended that an investigation be conducted into the circumstances under which the Tamil Nadu Generation and Distribution Corporation (Tangedco) released ₹5,767.18 crore to suppliers of 60% of its coal consignments without obtaining a mandatory Certificate of Country of Origin which was in violation of its own tender conditions. The certificate, which is to be provided by the government of the exporter, is an important marker of the genuineness of source of imports.
The DRI’s investigations had started in 2009 and Tangedco was one of the companies being probed. The CAG report suggests that there was a planned conspiracy that had been first identified by the DRI in March 2016. It quoted the DRI circular stating: “Imported coal’s procurement price was inflated by power generating companies and traders who supplied the coal to avail higher tariff compensation based on artificially inflated cost of coal.”