A Tale of Two Letters and a Review Petition

Or how the DRI failed to penalise the Adani group for allegedly obtaining undue benefits while trading in diamonds and gold jewellery after over a decade of investigations

For over a decade now, the Directorate of Revenue Intelligence (DRI), an investigative wing in the Department of Revenue of the Union Ministry of Finance, has been investigating companies in the Adani group for their unusual trading activities in cut-and-polished diamonds and studded gold jewellery. Four show-cause notices were issued by the DRI claiming that the group's firms had availed undue benefits to the tune of almost ₹1,000 crore. The case traversed through tribunals and courts till a bench of the Supreme Court recently dismissed the review petition of the government against the Adani group.

The first Show Cause Notice running into 205 pages was issued against various firms in the Adani group by the Additional Director General (ADG), DRI, M I J Michael on 30 March 2007 alleging misuse of export benefits while trading in diamonds and gold jewellery. The second Show Cause Notice, even longer at 272 pages, was sent by the ADG, DRI, V Ramu, on 11 September 2009. The third Show Cause Notice was issued by the same ADG soon thereafter on the last day of the same year. The fourth and final Show Cause Notice making similar allegations came nearly three years later on 19 December 2012 and was issued by another ADG, DRI, R K Singh. (All four documents are available on this website.)

Less than a month later, on 14 January 2013, P M Saleem, Commissioner, Customs, Mumbai, issued an order in favour of the DRI. A contrary point of view was expressed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in its order by member, judicial, Anil Chaudhary and member, technical, P S Pruthi, dated 26 August 2015. On 27 October that year, a bench of the Supreme Court comprising Justices A K Sikri and Rohinton Fali Nariman issued a judgment in Kanak Exports Versus Director General, Foreign Trade wherein the trade transactions of the Adani group were adversely and critically commented on. (These three documents too are available on this website.)

The DRI's investigation, the institutional responses in the form of notifications issued by regulatory bodies such as the Directorate General of Foreign Trade (DGFT) in the Union Ministry of Commerce and Industry, and the various proceedings before tribunals and courts reached an impasse in the Supreme Court. It appears that the Ministry of Finance dragged its feet on seeking a review of a Supreme Court order passed on 22 July 2016 which left the government high and dry, rendering uncertain the future of the DRI's investigations and the facts that were unearthed. We have information, learned through reliable sources, and through documents that we have obtained, that suggest, for the first time and exclusively, that there were sharp differences of opinion within the government over a review petition that was filed belatedly and then dismissed by the apex court.

The article titled "Did the Adani Group Evade Rs 1,000 crore in Taxes?" published in the Economic and Political Weekly (EPW) dated 14 January 2017 had reported about the Adani group’s alleged misuse of export incentives and indulgence in high-velocity circular trading across different national jurisdictions. The article in a nutshell summarised the DRI's allegations in this manner:

"A set of firms in the Adani Group apparently misused various export-incentive schemes through a complex web of front companies located in different parts of the world. These shell companies, which indulged in high-velocity 'circular trading' among related corporate entities, were also used to launder money, the DRI has claimed. All the corporate entities were directly or indirectly controlled by, or associated with, Adani Enterprises Limited (AEL), a flagship firm of the Adani Group which was called Adani Exports Limited before 2007. The DRI has alleged that AEL flagrantly misdeclared the freight on board (FOB, also called free on board) values of cut and polished diamonds (CPD) and gold jewellery."

"The investigative agency has also claimed that group companies and their associates indulged in circular trading to 'artificially' inflate exports and 'fraudulently' avail of financial benefits from various export promotion schemes initiated by the Directorate General of Foreign Trade (DGFT) in the Ministry of Commerce and Industry (MCI). Such schemes included the Incremental Export Promotion Scheme introduced by the DGFT in 2003–04 under which came the Target Plus Scheme (TPS) introduced in the Foreign Trade Policy 2004–09.

Detailed questionnaires had been sent to the Finance Minister Arun Jaitley, the then Minister of State for Commerce and Industry Nirmala Sitharaman, the DGFT, the Law Minister Ravi Shankar Prasad and to the head of the Adani group, Gautam Adani. Whereas spokespersons of the Adani group and the Law Ministry responded, Jaitley, Sitharaman and officials in their respective ministries did not answer the questions for more than a month and a half after the questionnaires were sent to them.

Soon after the publication of the article, on 30 January 2017 the Revenue Secretary in the Ministry of Finance, Hasmukh Adhia wrote to Mukul Rohatgi, the then Attorney General (AG) about moving a review petition against an earlier order of the Supreme Court. As reported in the EPW article, the Supreme Court (in Civil Appeals No 7016-7027) had dismissed all appeals by the DRI against the CESTAT order. As noted in Adhia’s letter to Rohatgi, this was tantamount to dismissing an earlier judgment of the apex court (dated 12 April 2016) in the DGFT versus Kanak Exports case in which AEL itself had been a petitioner and the practices of Kanak Exports were described by the Supreme Court as "a pernicious and blatant misuse of the provisions of the (export incentive) Scheme and periscopic viewing thereof establishes the same.... This Court, or for that matter the High Court in exercise of its writ jurisdiction, cannot come to the aid of such petitioners/exporters who, without making actual exports, play with the provisions of the Scheme and try to take undue advantage thereof.

Adhia noted in his letter to the then AG that the Supreme Court judgement in the Kanak Exports case give a "startling revelation of the extent of fraud committed by AEL and others to defraud the exchequer by fraudulent exports of gold jewellery, rough diamonds, cut and polished diamonds, etc under (the) DFCE (duty free credit entitlement) scheme, as also however under the Target Plus scheme." He noted that "AEL (Adani Enterprises Limited) and others had used a similar modus-operandi, imported the cut and polished diamonds and re-exported the same to artificially boost their export turnover, by resorting to overvaluation and circular trading, a fact brought out in detail by DRI in its investigation.

Adhia's letter to Rohatgi also noted the fact that the Additional Solicitor General of India had "not agree[d] for a review, [and instead] suggested that the matter may be referred to the AG for consideration." It was only thereafter that the reference was made.

We have learned through sources who wish to remain anonymous, that the AG responded in a letter dated 9 February wherein he noted that a review petition is rarely entertained by the Supreme Court, that it is not heard in open court but is circulated among the judges in their private chambers, and that there is no opportunity to argue a review petition. He stated further that review petitions are never entertained against an order of simple dismissal of a petition, and agreed with the Additional Solicitor General and the Solicitor General that no case was made out for a review petition.

Despite holding this view, Rohatgi noted a discussion he had with officers of the DRI, including D P Dash, the Additional Director General of the Revenue Department, in which the "nature of the case" was "explained" to him. He states that according to the department, the case did require a "relook" in view of its huge revenue implications. The then AG wrote that "though I was initially inclined to not support the view of filing a review petition, but in view of the circumstances explained by Shri Dash and the other officers present today, I am of the view that a review may be preferred before the Supreme Court of India."

He noted that much time had passed after 22 July 2016 when the Supreme Court's original dismissal order had been passed and that a review was barred by time. Hence, he said, a review petition with an application for condonation of delay may be filed at the earliest. He informed Adhia that B K Prasad, Attorney on Record in the Central Agency Section of the Supreme Court of India may be instructed to ensure that a review petition is filed within ten days of the letter (that is, within ten days of 9 February). He recommended that Advocate Rajiv Nanda be asked to draft the application/petition.

A special leave petition with an application for condonation of delay was filed in the Supreme Court on a separate case on the same day. It had apparently been filed on 25 January 2017, according to the Supreme Court’s website, at 2:58 pm. It was registered as Special Leave Petition (Civil) No 6311/2017 and Special Leave Petition (Civil)...CC No 3371/2017 on 9 February, the day the AG sent his letter. The application for condonation of delay was filed by advocate Anil Katiyar on 9 February at 4:30 pm according to the Supreme Court's website. This was a special leave petition with reference to an earlier Gujarat High Court order (TA-293-2016) which had been passed on 4 April 2016 in a case brought by the Commisioner of Income Tax against Adani Port and Special Economic Zone Limited (APSEZ), in which the high court's order was under challenge at the Supreme Court.

This petition also included an application for condonation of delay, as the impugned order of the high court (dated 4 April 2016) had been issued nine months earlier. The Supreme Court's website notes a defect in the initial filing of the petition, which was notified on 27 January, two days after the 25 January 2017 filing and three days prior to the letter to the AG by Adhia, that the date of filing had not been mentioned in the original filing. Presumably, it was in this period that the communications/meetings took place which resulted in the Additional Solicitor General choosing not to recommend the filing of a review petition, and instead, recommending that the matter be considered by the AG. The defect in the filing was removed on 7 February, according to the Supreme Court's website, two days prior to the 9 February response by Rohatgi.

The special leave petition in the Supreme Court was listed for hearing before Justices A K Sikri and R K Aggarwal on 17 February 2017. In their order, the delay was condoned. The petition was, however, "dismissed on the ground of low tax effect" This "low tax effect" referred, of course, to the amount that was relevant to the Gujarat High Court case and not precisely on the matter the Supreme Court had ruled on in the CESTAT order. It appears that various parallel developments were taking place in various cases against the Adani group were proceeding and took place swiftly in a matter of days, at various courts and within the executive and judicial branches of the Union government. Were each of the interlocutors aware of all the parallel developments? This is not clear.

It is important to note that Civil Appeals No 7016-7027 which were filed against the CESTAT order were filed on 6 April 2016, were registered on 6 July 2016 and dismissed on 22 July 2016.The review petition was filed in the Supreme Court seeking a review of the court's dismissal of the DRI's appeals against the CESTAT ruling on 21 February 2017, twelve days after Rohatgi's letter. Here, the AG chose not to appear as the advocate for the petitioners. This is Review Petition No 512-523 of 2017, as per the Supreme Court's website. The case diary is number 5882 of 2017. The application for condonation of delay was filed on 6 March. A stay application and an application for inspection of the relevant file was also filed by the advocate on 6 March.

The Supreme Court dismissed the review petition in an order dated 30 March 2017. A two-judge bench headed by Justice Madan B Lokur dismissed the petition with no clarificatory reason. The court is not obliged to provide a reason in such cases. The order rejected a hearing in open court that had been applied for, condoned the delay, and did not comment on the application for file inspection. However, it could have passed a spoken order in this case, which it chose not to. It is not only this case that the Supreme Court's declension to comment affects, it may affect a slew of investigations relating to trade in cut and polished diamonds that are waiting to reach their conclusion and in which show-cause notices was filed.

Despite being rejected, according the Supreme Court's website, the case is still listed as "pending". There could be a number of reasons for this. Proceeding along the principles of Occam's Razor, there are four possibilities. The first is that, as with many government bodies including courts, the website is yet to be updated with the correct case status. The second is a possibility arising from the back-cases which this review was appealing, whether the appeal at the Supreme Court itself, or the CESTAT rulings. In each of these cases, various compliance requirements may have come up following the passage of the orders. In that case, it could be necessary for the relevant parties to prepare and file compliance reports, before the review petition can be marked as disposed by the Supreme Court registry.

The third is a legal possibility. Following the rejection of a review petition, the only remaining legal option for appeal by the government is a curative petition. Before such a curative petition can be filed, a senior lawyer such as the AG must certify that it is a fit case for such a petition to be filed. The fourth possibility, and perhaps the simplest, is a technical one: the Supreme Court's website recently underwent a large interface and design overhaul, and it is possible that complete data migration has not taken place.

The short point: after a decade of investigations and the issuance of four Show Cause Notices, the DRI failed to convince the Supreme Court that it had established a case against companies in the Adani group for allegedly availing of trade benefits of almost ₹1,000 crore in a fraudulent manner. The question that remains unanswered: will the Ministry of Finance file a curative petition against the dismissal of the review petition by the Supreme Court?



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