Adani in Trouble with DRI again Over Sending out Forex thru Imports

Income Tax Enters Picture on Understating Profit

Customs officials are investigating whether Adani Group avoided paying taxes by inflating the cost of imported machinery. Directorate of Revenue Intelligence, sent a show-cause notice on 15 May to three power companies in the Group saying that power plants imported by Adani were over valued at Rs. 5,500 crores ($940 million) and that the purchase price was lower. (The DRI normally issues a show cause notice under Section 108 of Customs Act 1962 which covers smuggling cases).

DRI alleges that an Adani overseas subsidiary purchased equipment from overseas suppliers at a low price and then transferred these at a higher price to the parent in India. (As an independent unit, it has to keep a margin for its in-house costs and surplus. This is for its own efforts and does not constitute over invoicing to bring in money from India -Ed). The DRI seems to say that Adani is sending out profits from India to its Dubai branch by over invoicing the power plant. (There is a duty of 20.4% on power project import. Over invoicing has a cost. Of course, Export House Status duty credit scrips can be used to save duty. These are a reward for Adani’s past export performance. The higher the duty, the more the debit to the scrip. Thus over invoicing is not normal in import cases – Ed)

There is a set procedure for clearance of goods in a related party transaction. In this case, the assessing officer in the port of clearance has seen the purchase and sale invoice of the related Dubai Company, he must have seen to it that the price is that of “arms length” between supplier and buyer. The DRI action is thus over and above the actions of the jurisdiction Customs Commissioner.

The appraising officer has to see the prices of other power plants imported at the same time to check whether customs duty is being evaded. In this case of over invoicing or higher notional duty is being paid through duty credit scrips hence it cannot be termed as “duty evasion” or “smuggling”.

Of late, there are many cases where DRI is poking its nose in normal import transactions to allege smuggling. Revenue is extracted from importers at a gun point of Customs Act Sec.108 smuggling proceedings. The “evasion” so detected (10% of demand raised) is distributed to the DRI officers as tax free reward. The reward scheme was initiated by the then Finance Minister VP Singh in the mid eighties and continues in the books today even though 30 years have elapsed and the economy is liberalised with low tax rates. Thanks to the out moded scheme, revenue officers have become mercenaries in official clothing.

The story does not end here.

The income-tax (I-T) department is now looking into the possibility of tax evasion by Adani Group.

The income tax says that Adani has inflated its expenditure to bring down its taxable income to get a higher depreciation on inflated asset value.

The new entrants in Indian industry are being harassed by those already entrenched old timers. May be the new Government will give them justice.