An Indian government authority that investigates violations of customs law has alleged that three Adani Group companies have used intermediaries to artificially inflate the prices of imported coal-power goods. This practice, known as over-invoicing, enables companies to enrich a related third party and even to launder money, while passing on costs to consumers. The allegations against the Adani Group companies have bounced around inside the legal system for years, with little progress. Some insiders have alleged that the authority’s litigation may have been hampered by ‘an invisible outside hand’, leading to speculation that the government may be undermining its own investigation.
For eight years now, Indian government authorities have been pursuing an investigation into a group of over 40 companies in the coal-power sector alleging ‘over-invoicing.’ In summary, the authorities allege that these companies artificially inflated the costs of importing coal and power equipment, and, that based on those inflated costs, they charged higher power tariffs than were justified by their actual cost of production.
The authorities allege that these companies were using intermediaries linked to themselves and based in third countries (neither the exporting country, nor India) to generate false invoices showing a higher value for the imported goods than the actual price that they paid the suppliers in the exporting country. These inflated invoices were then submitted to Indian authorities. The schemes are said to have resulted in higher power tariffs that were borne by the Indian public, which is estimated to have over-paid for electricity to the tune of Rs 50,000 crore (about AUD $9.2 billion). These amounts, the government’s investigation allege, were then ‘parked’ in offshore accounts in tax havens around the world. Similar kinds of schemes have been associated with money laundering and acquiring larger government subsidies for certain activities.
The largest corporate conglomerate that has been subject to this investigation is the Adani Group, with several of its companies alleged to have practised over-invoicing. Some of these investigations are now proceeding through various stages of trial and adjudication.
On 30 August 2021, a hearing was scheduled in one such case at India’s Customs Excise and Service Tax Tribunal (CESTAT). The case involves allegations of over-invoicing of imports of equipment by three companies in the Adani Group. Two of the three companies run coal-fired thermal power stations in the states of Maharashtra and Rajasthan, and the third set up a power-transmission network in Maharashtra. It is equipment for these projects that alleged to have been the subject of over-invoicing. According to a report in the Indian Express, the hearing came about at the request of the Adani Group companies.
Eventually, no substantial proceedings took place at the hearing, with the government’s lawyer asking for more time to take instructions. The next date for hearing is for 25 October. This development is significant and unexpected, as this article will explain, and indicative of a possible failing in a long pending series of investigations into companies in the Adani Group by Indian government authorities.
These developments at the tribunal are in cases that were investigated by the Directorate of Revenue Intelligence (DRI), a wing of India’s Union Finance Ministry that is responsible for investigating violations of customs law. Concluding its investigation in 2016, the DRI had alleged in show cause notices (SCN) issued to the three Adani Group companies that they had ‘over-invoiced’ imports of power-plant and transmission equipment to the tune of Rs 5467 crore (around AUD $1.01 billion).
In 2017 however, an ‘adjudication authority’ of the DRI had dismissed its findings and quashed the SCNs. The DRI had appealed this dismissal before the CESTAT in 2018. It was this appeal by the DRI that the Adani Group companies urged the CESTAT to push forward and take up in an early ‘out of turn’ hearing.
The circumstances of the hearing being granted at the request of the Adani Group companies, despite the DRI’s objections, raise questions about the conduct of this long-pending investigation. To understand why, it is necessary to retrace the story of the investigations.
Between 2014 and 2016, the DRI issued several ‘show cause’ notices to companies in the power generation and related sectors alleging over-invoicing of imports of coal and coal-power plant equipment. The SCNs were sent to the Adani companies Adani Power Maharashtra Limited, Adani Power Rajasthan Limited and Maharashtra Eastern Grid Power Company Limited in May 2014. SCNs were also sent to a company named Knowledge Infrastructure Systems Private Limited (KISPL) that is significant to the current story. The KISPL case involved allegations of over-invoicing of coal imports to India from Indonesia.
These SCNs were the legal equivalents to chargesheets filed by police before courts in regular criminal cases and laid out the details of the DRI’s investigation, the evidence it had gathered, and the charges it had framed. The SCNs were then to be evaluated by an ‘adjudicating authority’ on the basis of the evidence and adversarial submissions in a trial-like proceeding by the DRI and the accused companies.
These cases of the three Adani companies and of KISPL all came before the same adjudicating authority – an official named K V S Singh.
Despite the cases being ‘identical’ in the DRI’s words, based on similar evidence and the same modus operandi, they resulted in different outcomes. While K V S Singh in December 2016 upheld the DRI’s investigation and charges in the KISPL case, he struck down the investigations against the three Adani companies in August and October 2017.
Subsequently, all these cases came up before the CESTAT, which is the appellate authority for the DRI’s investigations. KISPL challenged Singh’s order that upheld the case against it, while the DRI challenged Singh’s orders that quashed its case against the Adani Group companies. As these were the first cases in the wide-ranging over-invoicing investigation by the DRI they were of tremendous significance, with the fate of the rest of the investigation depending on the precedents to be set in the outcomes of these cases.
The KISPL case moved quickly. However, during the course of the appeal, the DRI came to believe that the deck was stacked against it and appealed to the President of the CESTAT that one of the members of the CESTAT bench that was hearing the case be recused, claiming that his conduct in the case had been ‘far from fair and impartial’. This was reported in the Caravan magazine. The DRI’s application failed and the CESTAT bench ended up ruling in favour of KISPL in that case in May 2018. This was the first of the over-invoicing cases that had reached a conclusion at the CESTAT.
Then the DRI appealed the CESTAT verdict in the KISPL case. Procedurally the court of appeal was India’s Supreme Court but, in a strange move, the DRI instead appealed to the Bombay High Court. In June 2019, the Bombay High Court dismissed the DRI’s appeal, stating that it was not the appropriate venue for the appeal.
The cases of the three Adani Group companies, meanwhile, remained in early procedural stages at the CESTAT without moving forward to substantive hearings.
In an affidavit submitted to the Delhi High Court in November 2019, the DRI explained how the outcome of the KISPL cases would affect the rest of its investigations into alleged over-invoicing. (This occurred during the course of hearings on a Public Interest Litigation filed by a Delhi-based NGO that is led by the advocate and anti-corruption activist Prashant Bhushan.)
That affidavit effectively stated that the KISPL case constituted a ‘test case’ for all of the DRI’s over-invoicing investigations. It stated that five SCNs that covered 14 different companies (including five more Adani Group companies) were awaiting adjudication and had been placed ‘on hold’ while the DRI awaited the conclusion of appeal proceedings in the KISPL matter.
The Adani cases at the CESTAT
In the current application by the Adani companies seeking an early hearing at the CESTAT where the DRI has appealed K V S Singh’s order dismissing its investigations into the three Adani Group companies, the DRI sought to make a similar argument as it did in its affidavit before the Delhi High Court.
The DRI argued before the CESTAT that the Supreme Court is supposed to rule on the KISPL case, which had an ‘identical’ modus operandi as in the Adani cases. Since the outcome of that matter would be significant for the proceedings at the CESTAT in the Adani cases, and it was sub judice before the Supreme Court, therefore the DRI argued there was no justification for the CESTAT to allow the early ‘out of turn’ hearing that the Adani Group companies had applied for.
The Adani Group companies had presented the following arguments justifying their application for an early hearing:
- The disputed amounts involved in the cases are quite substantial;
- Independent directors, auditors, financial institutions and lenders had been regularly inquiring about the status of pending appeals;
- The dispute had been widely publicized, causing concern amongst the appellant’s lenders and shareholders;
- An alleged vilification campaign by vested interests, including in and through the media, had resulted in erosion of equity value, thereby triggering a cascading effect on the applicant’s business;
- The dispute had had a vital impact on the appellant’s Group companies inasmuch as various foreign investors, lenders, financial institutions were frequently contacting the group seeking to ascertain the status of pending dispute.
Faced with these arguments, the CESTAT sided with the Adani Group companies due to one crucial reason. The bench accepted the notion that the KISPL case at the Supreme Court would set a precedent for the Adani cases. However, the bench extended that argument to note that at present, the CESTAT’s order that dismissed the DRI’s charges against KISPL was still in force. Though the DRI had indeed filed an appeal at the Supreme Court against that CESTAT order, the bench noted that the apex court had yet to issue a stay on the operation of that order. Therefore, the operational judicial precedent affecting the Adani cases was the CESTAT’s order that had dismissed the DRI’s investigation of KISPL. This, the CESTAT bench said, invalidated the DRI's argument.
Crucially, the CESTAT noted, the DRI had not taken key steps needed to seek a stay order. The appeal has ‘only been filed... and no further follow-up action either for disposal of the stay application or for admitting the appeal pending before the Hon’ble Supreme Court [has] been taken’ the order notes.
‘This Bench has given sufficient opportunity specifically to the Revenue to make efforts and to obtain necessary admission and / or stay from the Apex Court in the cases cited above. However, except for writing a letter to the Counsel for Revenue, the status of the appeal remained unchanged’ the order continues. Based on this reasoning, the CESTAT held that the Adani companies’ request for an early hearing could be granted.
Why has the DRI not followed up at the Supreme Court?
A question of some significance regarding the status of the entire investigation is why, over two years after the Bombay High Court dismissed the DRI’s appeal in the KISPL case, has the DRI still not effectively pursued its appeal at the Supreme Court? Why has the agency, or rather, the counsel for the Revenue department in the Finance Ministry, not acted to seek a stay order, or to get its appeal admitted for hearing by the Supreme Court?
For years now, allegations have swirled around the DRI’s investigation suggesting that there is an effort by elements in the government to undermine the government’s own investigation into over-invoicing. The allegations have been made both by DRI officials speaking anonymously to the media and by politicians. With regard to the KISPL appeal at the CESTAT, a senior DRI official had commented anonymously in the Caravan’s report that the case had ‘almost been pulled out from the jaws of victory in a consistently unethical manner, while some in the top brass of the DRI seem to have been reduced to becoming helpless bystanders.’ In an earlier report by India Today a DRI official was quoted as saying that ‘it looks like an “invisible outside hand”’ is interfering in the investigation’.
In September 2018, meanwhile, Jairam Ramesh, a spokesperson for India’s largest opposition party, the Congress, and a former Union Minister, accused the government of not acting to secure its position in the investigation in proceedings before the Bombay High Court. Companies in the Adani Group had moved the Bombay High Court seeking to block the DRI’s investigation into its subsidiaries in foreign jurisdictions such as Dubai and Singapore in the over-invoicing matter. The DRI had secured Letters Rogatory (legal instruments whereby an Indian court can seek the assistance of a court in a foreign jurisdiction to help Indian agencies secure information under the foreign court’s jurisdiction) that it intended to use to seek access to company documents of those foreign subsidiaries that it needed for its investigation. The Adani Group companies had moved the Bombay High Court seeking to quash those Letters Rogatory. At that time, Ramesh had alleged the government had failed to appoint a senior counsel to argue the case at the Bombay High Court and that this was helping Adani’s cause. (The Bombay High Court had upheld Adani’s appeal and quashed the Letters Rogatory in that case, but this ruling was later overturned by the Supreme Court).
Allegations of ‘sabotage of the probe’ by the DRI have also been made by a member of the Bharatiya Janata Party (BJP) – India’s ruling party. Subramanian Swamy, a senior leader of the BJP and a member of Parliament had written to Prime Minister Narendra Modi, also in September 2018, pointing out the ‘mess’ that the cases were in. His letter had alleged that ‘officers of questionable integrity’ had been posted to the DRI to handle investigations and adjudication in Mumbai and that the DRI had ‘consistently failed in handling litigations with due diligence’ which had ‘gone unchecked’ by the Finance Ministry.
Is the failure to pursue the appeal at the Supreme Court further indication of the same?
This correspondent sent questionnaires to the Revenue Secretary in the Union Ministry of Finance Tarun Bajaj (under whose ultimate authority the DRI functions in the Finance Ministry), to the present Director General of the DRI, Balesh Kumar, and to the Government of India’s Press Information Bureau seeking their comments on the failure of the DRI to pursue the appeal as described in the CESTAT order. Comment was also sought from the Adani Group but no response was received. This article will be updated if responses are received.