Customs slaps Rs 57 cr penalty on Jindal firm

The Jindals were importing the equipment for their integrated steel plant under the Export Promotion of Capital Goods (EPCG) scheme. While the imports of capital goods was declared at Rs 183 crore, the Jindals had other agreements which promised topay VAI Rs 131 crore for technical and other services. As such, according to the customs, the actual value of the imports was Rs 314 crore. The additional duty that the customs has levied is on the additional imports that have taken place in the form of the secondary agreements with VAI.

While all imports under the EPCG scheme are duty-free, this is only if a hefty export obligation is undertaken by the company. So, if the Jindals had declared the full value as Rs 314 crore, they would have had to undertake to export a much larger amount over the next few years. By declaring a lower value of imports on the EPCG license, they have managed to lower their export obligation considerably.

The order was passed last month. Though the Jindals are likely to contest the order, R D Sharma, the commissioner of customs (Export Promotion) who passed the order has pointed out that the importers were given an opportunity to present their stand on four occasions — from December 8 to February 11 — but kept trying to getthe hearing adjourned.

The crux of the Customs case is three side-agreements that the Jindals entered into with VAI, in addition to the one on the equipment supply itself — on license fee, engineering services and a service contract. While normally fees paid by a firm to an outside consultant would not really matter to the Customs department, in this case, all the three agreements show that the fees being paid is an integral part of the supply agreement for the main equipment.

So while the Jindals told the Customs authorities that the three agreements had nothing to do with the main equipment agreement, and that each was an independent contract, according to the Customs, this is not true. The Jindals also said that the three contracts would carry on irrespective of whether or not they bought the equipment from VAI — the actual contracts, however, make it very clear that the equipment cannot be bought until the other contracts have been signed with VAI.

Thus, for example, the Supply Contract says that“a further integral part of this supply contract is the Operation License Agreement by and between the buyer and the seller.” Similarly, the Engineering Contract says that “a further integral part of this engineering contract is the operation license agreement by and between the buyer and the seller.” The service contract, in turn, says that the operational license agreement is an integral part of it, and that it will be operational only after the engineering, supply and operational license contracts have been signed by both parties. In case the engineering or service contract is terminated, the supply contract can also be terminated.

Worse, the Jindals did not provide the Customs any information on these contracts on their own, but produced the contracts only when, based on an intelligence tip-off, the department asked the company to provide the documents, last April.