Grandhi Mallikarjun Rao with Praful Patel

High-flying honchos trip on ‘flying tax’

COVER-UP: Biggest-Ever Customs Duty Scam

Paranjoy Guha Thakurta | New Delhi | 4 May 2009 |

The Ambani Brothers, the Oberois, the Taj Group, Videocon, Jagsons - the list goes on - a veritable corporate who’s who have been served notices by the Customs for evasion of duty to the tune of Rs 4,000 crore. But it seems GMR has been able to slip through the net.

It is the biggest-ever case involving evasion of customs duty to the tune of Rs 4,000 crore and involving some of the best-known names from the Indian corporate world and their political mentors. Even before the ink dried on a series of show cause notices issued by a clutch of honest officers against a host of companies for having imported aircraft by evading taxes, another bunch of bureaucrats belonging to the department of customs in the Ministry of Finance is busy scuttling the investigations to jeopardise the department’s own findings.

In a case relating to GMR Aviation – a company in the corporate group that is engaged in modernising the Delhi airport and which had built the new Hyderabad airport – a senior customs department official has sought to drop the proceedings that were initiated by her own colleagues. It is apprehended that her order may set a precedent to drop similar, if not identical, proceedings that are pending against other companies.

To understand the modalities of the ongoing cover-up operation, the broad contours of the show cause notices that have been issued so far alleging customs duty evasion while importing aircraft need to be outlined. As had been pointed out by this publication earlier (see CURRENT, September 1-7, 2008), over a 15-month period between May 2007 and July 2008, more than 250 aircraft and helicopters valued at not less than Rs 16,000 crore were imported into the country by more than 70 companies controlled by some of India’s most prominent industrialists.

Most of these aircraft were imported in a manner that aimed at evading customs duty. What is noteworthy is that most of these private jets and helicopters have been used not merely by the corporate honchos who own the aircraft, their family members and business associates but also by their “friends” in politics. During the current election campaign, private aircraft have been in great demand.

It is learnt that these flying machines have been used by many members of the Union Cabinet and Council of Ministers, as well as by leaders of other Opposition political parties including the Bharatiya Janata Party. But, to be fair to our netas, it should be stated that many of them may not have been aware that the aircraft they have been flying in, have been imported without paying the requisite customs duties.

The total value of customs duty allegedly evaded is in the region of Rs 4,000 crore, this amount representing roughly a quarter of the c.i.f. (cost, insurance and freight) value of the imported aircraft. Since the penalty for evading customs duties is typically four to five times the duty payable, the bigger figure of revenue loss to the national exchequer could vary between Rs 16,000 crore and Rs 20,000 crore.

The companies that have been served show cause notices by the customs authorities include Reliance Commercial Dealers Pvt Ltd (part of the Mukesh Ambani led Reliance Industries group), Reliance Transport and Travels Ltd (part of the Anil Dhirubhai Ambani group), East India Hotels (Oberoi group), Taj Air (Tata group), India Bulls, Bharat Hotels, Ranbaxy, Indo-Pacific Aviation (Punj Lloyd), Videocon, Taneja Aerospace & Aviation, Jagsons, Dove Airlines (Usha Martin), Global Vectra Helicorp, Adani, Airmid Aviation Services and International Air Charter Operations.

In this “exclusive” group of companies is GMR Aviation that is part of the industrial empire headed by Grandhi Mallikarjun Rao, the tycoon worth many billions of US dollars who is the owner of the Delhi Daredevils cricket team in the Indian Premier League and who is reportedly trying to become the new owner of Liverpool, the British soccer team. The Bangalore-based GMR group is involved in constructing a number of infrastructure projects. The group was responsible for building the new Hyderabad airport and is currently engaged in modernising Delhi airport. It is also in agro-businesses, notably sugar. More about GMR Aviation later.

Among the firms that imported aircraft and paid customs duty pursuant to investigations being conducted were Jindal Steel Works, Futura Travels, Raymond Ltd., Indian Metals & Ferro Alloys, SKB Infracon, Sky Airways and Privilege Airways. Investigations are also being conducted on Kingfisher Airlines headed by Vijay Mallya. Customs officials are looking into whether Kingfisher imported spare parts without paying the requisite duty and whether aircraft meant for scheduled commercial operations were used for private purposes.

Of all the imported aircraft that were seized, the most expensive one was the Rs 231-crore Airbus A-319 that had been imported by Reliance Commercial Dealers. This fancy aircraft, with a plush master bedroom, fancy bathrooms, a bar and a business centre, was reportedly “gifted” by Mukesh Ambani to his wife Nita on her 44th birthday in November 2007. A Falcon aircraft was also imported by the same company. After both planes were seized, an amount close to Rs 500 crore had to be shelled out as bond value together with bank guarantees worth Rs 100 crore. Anil, the younger Ambani sibling was not far behind. His Global 5000 aircraft was also seized and provisionally released after payment of Rs 144 crore as bond value (that matched the value of the aircraft) and over Rs 36 crore as bank guarantee.

The legal aspects of the scam are complex. On March 1, 2002, a notification (No. 21/2002) issued by the Ministry of Finance (then headed by Yashwant Sinha) effectively abolished customs duty on imported aircraft. Five years later, on February 28, 2007, the then Finance Minister Palaniappan Chidambaram stated in his budget speech that 3 per cent customs duty plus countervailing duty and additional duties would be levied on all private imports of aircraft (including helicopters) with effect from the following day, by amending the 2002 notification. What this meant was that basic customs duty of 3 per cent, countervailing duty of 16 per cent, special additional duty of 4 per cent plus education cess would be levied on all private imports of aircraft – the aggregate effective incidence of duty working out to around 25 per cent of the landed price of the aircraft.

Two months later, on May 3, 2007, a new notification was issued by the Department of Customs, Central Board of Excise & Customs, Ministry of Finance (No. 61/2007) completely exempting private imports of aircraft from payment of customs duty under certain conditions. It was stated that in order to be eligible for exemption from payment of customs duty, the aircraft would have to be imported by an operator who had been approved by the Directorate General of Civil Aviation (DGCA) in the Ministry of Civil Aviation to operate the aircraft under a non-scheduled operator  (passengers) (NSOP) permit or provide non-scheduled charter services.

It was amply apparent that customs duty would continue to be levied on aircraft that were imported for private purposes. Condition No. 104 that exempted imported aircraft from payment of customs duty stated that the importer would furnish an undertaking to customs officials that the aircraft would be used only for providing non-scheduled passenger or charter services and that the importer “shall pay on demand, in the event of his failure to use the imported aircraft for the specified purpose, an amount equal to the duty payable on the said aircraft but for the exemption under this notification”.

According to Rule 3 of the Aircraft Rules, 1937, “scheduled (passenger) air transport service means an air transport service undertaken between the same two or more places and operated according to (a) published time table or with flights so regular or so frequent that they constitute a recognizably systematic series, each flight being open to use by members of the public”.

Further, as per the “requirement” issued by the Ministry of Civil Aviation, Section 3, Air Transport Services, Series ‘C’, Part III, dated October 8, 1999 (Paragraph 9.7), stated that “non-scheduled operators shall issue passenger tickets in accordance with the provisions of the Carriage by Air Act, 1972”. These tickets should stipulate the “conditions of carriage” including the “liability of the operator” that shall be the same as the conditions applicable to scheduled air transport operators.

According to the “requirement” specified in Part V, dated May 17, 2000, a charter operation is defined as “an operation for hire and reward in which the departure time, departure location and arrival location are specially negotiated with the customer or the customer’s representative for the entire aircraft” in which case no tickets are sold to individual passengers.

As per the notification issued by the Directorate General of Foreign Trade (DGFT), Ministry of Commerce, (No. 2(RE 2006)/2004-09) dated April 7, 2006, read with Import Licensing Note (1 and 2 of Chapter 88 of ITC(HS) for 2004-09), an aircraft can be imported only by a person who has been granted permission by the DGCA in the Ministry of Civil Aviation for operating scheduled or non-scheduled air transport services subject to the condition that the use of the aircraft is in accordance with the permission.

Sources connected with the investigation told CURRENT that tickets were not issued to the passengers travelling in the imported aircraft, nor were charter agreements executed. Thus, the aircraft were actually used for private purposes and hence, the aircraft were liable for confiscation under Section 111(d) and (o) of the Customs Act, 1962. They further allege that the importers of aircraft had “deliberately” and “wilfully” withheld information about the manner in which the aircraft would be used and was used in order to evade payment of customs duty.

It was also clear that the entire operation entailed collusion among corrupt customs officials and those in the Ministry of Civil Aviation. One IAS officer in the Ministry of the rank of joint secretary was “interrogated” by customs officials to find out his  “complicity”.

On August 14, the Delhi High Court dismissed two writ petitions that had been filed against the customs authorities for seizure of aircraft by Global Vectra Helicorp and Taneja Aerospace. The petitioners were asked to furnish bonds for the full value of the imported aircraft plus bank guarantees worth nearly Rs 17 crore. Four days later, on August 18, another writ petition filed by Dove Airlines in the Kolkata High Court was also dismissed and the petitioner was asked to furnish a bond and a bank guarantee of Rs 3.25 crore.

A few important questions connected to the scam remain unanswered. What really transpired between March 1, 2007 and May 3 that year? Why did the Ministry of Finance change its own rules in two months? Was there pressure from certain lobbies? Who in the DGCA facilitated the evasion by issuing no-objection certificates to the importers of aircraft?

There are other important questions that need to raised, but first the details of the case concerning GMR Aviation Pvt Ltd, a wholly owned subsidiary of GMR Infrastructure, which is part of the GMR group. On June 21, 2007, the company imported an aircraft (Falcon 2000 EX Easy) valued at Rs 111.44 crore from Dassault Aviation, France. In a statement made by Col Sanjeev Sethi, general manager (aviation) of GMR Aviation, acknowledged that between August 2007 and May 2008, the aircraft had flown for a total duration of 498.25 hours, of which 438 hours (or around 86 per cent) had been flown for the use of the corporate group’s chairman, directors, their guests and their relatives – or essentially as a “private” aircraft – while only 60.25 flying hours (or roughly 14 per cent) had been shown as having being used for “charter” flights.

Despite these facts being accepted and despite the fact that not a single hour of an aircraft being used under a non-scheduled operators (passengers) or NSOP permit can be used as a “private” aircraft, on February 27, 2009, JM Shanthi Sundaram, Commissioner of Customs (Preventive), New Delhi, issued an order (see photocopy) dropping the proceedings against GMR Aviation. She did not agree with her own colleagues’ interpretation of the rules that an aircraft imported “only” for providing NSOP services means that not a single minute, leave alone an hour, of the flying time of the concerned aircraft can be used for “private” purposes, that is, not for “charter” flights under the NSOP permit. As a matter of fact, the show cause notices issued by the customs department hinges on the use of the word “only” in May 3, 2007, notification in which the language used is explicit and clear.

In Ms Shanthi Sundaram’s order running into 71 pages (which is now a public document and which is available with CURRENT), an analogy has been drawn about the alleged use of the aircraft for “private” purposes to the owner of a taxi who uses his cab for personal purposes. However, this logic is rather weak and by the admission of GMR Aviation itself, the imported aircraft was used for “charter” flights for barely 14 per cent of its total flying time.

In her order, Shanthi Sundaram has dwelt at some length on the issue of the relative jurisdictions of the department of customs and the Directorate General of Civil Aviation (DGCA) in renewing the licence of the aircraft after it was seized by the customs department on July 14, 2008. Still, she concedes that the “documents submitted by the party (GMR Aviation) on the basis of which renewal (of the aircraft’s licence) was granted (by the DGCA) are not relevant for consideration of this issue (of whether the aircraft can be used only for providing NSOP services)…”

Why was GMR Aviation’s appeal against the show cause notice issued against it by the customs department adjudicated on first before the other show cause notices, especially the notices relating to evasion of duty payable on the aircraft imported by companies in the corporate groups headed by Mukesh Ambani and Anil Ambani? Could it be that in some of these other instances, the imported aircraft did not even have a “fig leaf” of a claim that they were being used for “charter” flights and not for “personal” use by the concerned tycoons and their friends in politics?

Shanthi Sundaram’s order has shocked a number of officers who were associated with the investigations. They apprehend that this order could be used as a precedent to let others off the hook. It is learnt that high-ups in the customs department are under pressure to go easy on initiating proceedings to appeal against her order before the Customs, Excise & Service Tax Appellate Tribunal by early June, by which time a new Union government is expected to be in place in New Delhi. And even if the matter comes up before the Tribunal, it remains to be seen how convincingly the customs department will argue in favour of its own officers who investigated and unearthed this huge duty evasion scam that involves the high and mighty of the land.