Caught in tax net

The late W.N.Chadha, in a March 2000 picture. He was Bofors' long standing agent in India and a recipient of commission in the Howitzer deal. - RAMESH SHARMA

The IT Appellate Tribunal order holding W.N. Chadha's legal heir liable to pay tax on the commission received revives interest in the Bofors case.

THE Bofors scam of 1987 had led to probes by key investigative agencies such as the Central Bureau of Investigation (CBI) and the Income Tax department, and the Joint Parliamentary Committee (JPC). Of these, the CBI recently sought the Special Court's permission to close the case, while the JPC had concluded in 1987 that there were no middlemen in finalising the deal between Bofors and the Government of India and that Bofors had paid only winding-up charges.

The probe by the Income Tax department into possible tax evasion by Bofors' agent in India took its own course. On December 31 last year, Judicial Member of the Income Tax Appellate Tribunal (ITAT), New Delhi, R.P. Tolani, delivered an order that lucidly traced the money trail in the scam and rebutted each and every contention of Hersh W. Chadha, son and legal heir of the then Bofors agent in India, the late W.N. (Win') Chadha. Hersh Chadha had contended that he had not received any illegal commission from Bofors for concluding the arms deal with the Government of India and that he was not liable to pay income tax on that commission.

Tolani's order came on a group of appeals filed by Hersh Chadha relating to the assessment years 1987-88 and 1988-89. An appeal had been filed against the assessments made by the Assessment Officer (A.O.), but it was turned down by Commissioner of Income Tax (A), who confirmed the assessments. Hersh Chadha then filed the second appeals, which Tolani decided. The A.O. had held that W.N. Chadha had received a commission from Bofors over and above the commission shown in the returns of income. W.N. Chadha had represented Bofors as its agent in India for long.

The Indian defence purchase policy, until 1984, allowed foreign bidders to have agents in India. However, they were required to furnish details of their Indian agents, if any, to the government in a prescribed proforma. Subsequently, the government made a uniform policy prescribing that agents were not to be allowed in defence purchases, and if any bidder had maintained one, the amount so payable to the agent by the supplier was to be reduced from the quoted deal. The revised policy was to ensure that the deal was on a principal to principal basis, to avoid undesirable consequences that may arise out of such arrangement and to save on the defence budget and thus reduce cost to the public exchequer.

In respect of the Bofors deal, there were four firms involved in the bidding, namely, M/s Sofma (France), M/s Bofors (Sweden), M/s International Military Services (Britain) and M/s Voest Alpine (Germany). These bidders had furnished the requisite information about their agents in India.

Bofors, in its declaration dated May 19, 1984, had stated that W.N. Chadha of Anatronic General Corporation, New Delhi, was its agent and Hersh W. Chadha, Brig. B.B. Bhatnagar and A.L. Verma were designated to liaise with the Government of India for the contract.

Consequent to the changed defence purchase policy, the Defence Department asked Bofors to dispense with the services of its declared agent and comply with the new requirements. Bofors did not respond immediately and as late as on March 10, 1986, wrote to Defence Secretary S.K. Bhatnagar that Bofors did not have any representative/agent especially employed in India for this project and that Anatronic General Corporation was being used only for administrative services such as hotel bookings, transportation, forwarding of letters, telexes, and so on.

Following this, on March 24, 1986, Bofors and the Government of India entered into a contract after approval by the then Prime Minister, who was also the Defence Minister, for supplying 400 FH 77-B gun systems along with vehicles, ammunition and other accessories, at a total cost of Rs.1,437.72 crore (as per the exchange rate then without reducing any agent representation). The signatories of the contract were S.K. Bhatnagar for the Government of India and Martin Ardbo, president, Bofors, and Anders G. Cariberg, president and chief executive officer of Nobel Industries, for and on behalf of Bofors.

As per the terms of payments stipulated in the contract, the Government of India paid Rs.296.15 crore as 20 per cent of the total amount of the contract (with the exclusion of any amount related to services) on May 2, 1986, after receiving an advance payment guarantee from Bofors.

On April 16, 1987, after the delivery of the gun systems had started, a radio broadcasting channel, Dagens Eko, of the Swedish Radio, broadcast the news that Bofors had violated Swedish law by managing to obtain the contract by paying Indian agents huge amounts as bribes. The illicit payments to the agents and others were said to have been made by transactions in secret bank accounts in Switzerland.

In June 1987, the Swedish National Audit Bureau (SNAB) disclosed that there was an agreement between Bofors and ...(omitted) concerning the settlement of commission subsequent to the FH-77 deal and that considerable amounts had been paid subsequently to, among others, A.B. Bofors' agent in India. The SNAB, however, did not mention the names of the recipients. The SNAB report disclosed that Bofors not only continued with its agent after the Government of India barred the use of agents in defence procurement, but the amount of commission payable to the agent and related parties had not been deducted from the price.

It also emerged that despite the Indian government's insistence on not appointing or paying any agent, Bofors entered into a consultancy agreement with M/s A.E. Services Limited of the United Kingdom on November 15, 1985, at the behest of Ottavio Quattrocchi, an Italian. A.E. Services was appointed consultant to Bofors for the award of the contract from the Government of India for the 155mm gun systems. Bofors suppressed the fact of its agreement with A.E. Services in its letter of March 10, 1986, addressed to the Ministry of Defence, in terms of disclosure and reducing the cost of the deal as stipulated.

Quattrocchi was instrumental in bringing about the agreement between A.E. Services Limited and Bofors. He was a certified chartered accountant working with Snamprogetti, an Italian multinational company involved in the construction of oil refineries and gas processing, petrochemical and fertilizer plants and pipelines. Neither Snamprogetti nor Quattrocchi had any experience in guns, gun systems or any related defence equipment.

Money trail

Bofors paid SEK (Swedish kroner) 50,463,966 ($7,343,941.98) to A.E. Services Limited on September 3, 1986, through its account at Nordfinanz (NFZ) Bank, Zurich. This account of A.E. Services Limited had been opened only a fortnight earlier, on August 20, 1986, by its director. The amount works out to exactly 3 per cent of the amount of advance paid by the Government of India to Bofors and was perfectly in accordance with the terms set out in the A.E. Services Ltd-Bofors agreement of November 15, 1985.

From this account of A.E. Services, $7,123,900 was transferred to the account of M/s Colbar Investments Limited Inc., Panama, with the Union Bank of Switzerland, Geneva. On July 25, 1988, an amount of $7,943,000 was transferred out of the Colbar account to the account of M/s Wetelsen Overseas SA with the Union Bank of Switzerland, Geneva. On May 21, 1990, an amount of $9,200,000 was transferred from the Wetelsen account to the account of International Investments Development Co., with Ansbacher (CI) Limited, St. Peter Port, Guernsey (Channel Islands). The Colbar account and the Wetelsen account were being controlled by Quattrocchi and his wife Maria Quattrocchi.

While opening the account of Colbar Investments with the Union Bank of Switzerland on March 30, 1984, Quattrocchi had mentioned his address in India as Colony East, New Delhi/India, which was a fake address.

Investigations in Guernsey revealed that the entire money, that is, $9.2.million, had been channelled into various accounts in Switzerland and Austria within 10 days of its receipt in Guernsey. The Court of Special Judge, Delhi, issued Letters Rogatory to the competent authorities in these countries for judicial assistance in investigation there.

Bofors also had a consultancy agreement with an entity incorporated in Panama, namely, M/s Svenska Inc., since 1978. It was agreed in January 1986 that commission to the extent of 3.2 per cent of the ex-works value would be paid to M/s Svenska Inc. Letters Rogatory were issued by the Court of Special Judge, Delhi, to Switzerland, Sweden, Panama, Luxembourg, the Bahamas, Jordan, Liechtenstein and Austria with a view to finding out other beneficiaries of the commission amounts.

Documents received from the Swiss authorities revealed that on May 6, 1986, payments were made by Bofors to Svenska Inc. from its account with Skandinaviska Enskilda Banken, Stockholm. A calculation of these payments revealed that this was almost 2.24 per cent of the total value of the contract, exactly as per the terms of their agreement. A calculation of additional payments made by Bofors also revealed that each additional payment worked out to exactly 0.96 per cent of each invoice issued by Bofors and the date of payment matched the date of payment by the Government of India.

ITAT and evidence

The significant aspect of the ITAT order is that it seeks to rebut in detail each and every challenge by Hersh Chadha to the A.O.'s assessment. The ITAT ruling is based on certain crucial pieces of evidence. The first income-tax assessment was made in 1990 on the basis of two agreements of Bofors one with Anatronic and the other with Svenska and the letter of Sven Rambergain, an associate of W.N. Chadha. Rambergain wrote to W.N. Chadha on July 7, 1986, after the Government of India signed the Bofors deal, as follows:

I am very pleased that you were involved in the Bofors billion business, not only considering your well earned fee but also proving that Anatronic Corp. can do business with some people... doubted some years ago.

According to the ITAT, this letter showed that W.N. Chadha was actually involved in the Bofors gun deal and that a substantial amount was paid to him as commission. When the Government of India decided against middlemen, Bofors introduced Svenska, while Anatronic was retained to provide support services in India to Bofors. The bulk of the commission due to W.N. Chadha was given through Svenska.

W.N. Chadha, the ITAT discovered, finally received commission of 6 per cent due to him; partly in the accounts of Anatronic and the rest in the accounts of Svenska. The ITAT agreed with Hersh Chadha that this letter was not conclusive by itself, but added that when seen in the backdrop of other circumstantial evidence it assumed great importance and corroborated the receipt of commission.

In the second assessment made in 1992, the SNAB report was added. The report quoted the president of M/s A.B. Bofors, Per Ove Morberg, as saying that the principal beneficiary in M/s Svenska Inc. is an Indian, who has been an agent for Bofors for 10 to 15 years. The ITAT's order suggested that the reference was to W.N. Chadha and none else. Hersh Chadha argued that the SNAB report was only a press report. The ITAT, in reply, pointed out that it was not a press report but formed a part of the report of the Joint Parliamentary Committee (JPC).

In the third assessment, the details of the first information report (FIR) filed by the CBI and the observations of the Delhi High Court were also relied upon. And for the first time vital facts came to light, including the existence of an account with the Swiss Bank Corporation, Geneva, into which the money paid to Svenska was credited and the fact that this account was operated and managed by W.N. Chadha under a power of attorney.

Assessment proceedings were set aside by the CIT(A) on four occasions on the grounds that investigations were in progress and material available on record was not sufficient to uphold the additions in income in respect of this commission. It was only in the fifth round that the order of the A.O. was confirmed by the CIT(A), which was challenged in the second appeal before Tolani.

Responding to Hersh Chadha's contention that there was no evidentiary value of the CBI's charge sheet in the Bofors case, Tolani held that the A.O. relied primarily on the facts given in the charge sheet, particularly with regard to bank account no. 99921-TU with Swiss Bank Corporation, Geneva. W.N. Chadha opened and operated this account under the power of attorney given by Svenska. A perusal of invoices showing the payment of money by Bofors to Svenska clearly indicated that the money was credited into this account.

Hersh Chadha did not deny the existence of this account or that it was in his or his mother's (Kanta Chadha) favour. Tolani rejected Hersh Chadha's plea of ignorance with regard to agreements with Svenska and held that photocopies of these documents could be relied upon as secondary evidence.

Tolani did not join issue with the JPC on its finding that there were no middlemen in the Bofors deal. Instead, he circumvented it by suggesting that it was not the issue. According to his ruling, the most vital fact is that the appellant (Hersh Chadha) received a commission through the bank account of Svenska and this fact was sufficient to establish that there was income chargeable to tax.

Tolani also pointed out that Hersh Chadha could not deny that both Svenska and Anatronic worked for Bofors for the same deal and at the same point of time. While the commission of Anatronic was reduced following the declaration of the Government of India barring middlemen in defence deals, the commission of Svenska was raised. The commission paid to Svenska reached the assessee (W.N. Chadha) through the bank account mentioned.

Tolani held that W.N. Chadha had much more important functions to perform as the agent of Bofors than that of a mere booking agent that Bofors claimed he was. Bofors had deputed him to attend regional conferences to meet other suppliers on a principal to principal basis. This is not any inference drawn, but the assessee's own admission on oath, Tonali wrote in his order.

Hersh Chadha also argued before the ITAT that The Hindu, which had carried a series of investigative reports on the Bofors scam, neither authenticated the source of its information nor produced the original documents, and that he was not given an opportunity to cross-examine The Hindu journalists who wrote the series of reports.

Tolani rejected his contention saying the reports carried by The Hindu were a further corroboration of the facts to show that the assessee was the recipient of commission from Bofors. Besides, he pointed out that the assessee had made no specific request to cross-examine journalists of The Hindu. Even if The Hindu material was ignored, it would not change the fact that Svenska funds were payments made by Bofors for the assessee, the ITAT said in its order.

The Quattrocchi case

The ITAT order has shifted the focus to the CBI's plea to withdraw the prosecution of Quattrocchi, currently being heard by the Chief Metropolitan Magistrate (CMM), Delhi, Vinod Yadav. The CBI's plea has been challenged as an act of collusion with Quattrocchi by the advocate-petitioner Ajay K. Agrawal.

The CMM had scheduled for January 4 the pronouncement of judgment on the CBI's closure report in the Quattrocchi case but deferred it when Ajay Agrawal urged the court to have a fresh look at it in the wake of the ITAT's order.

Additional Solicitor-General P.P. Malhotra said there was nothing new in the Tribunal order as all the details mentioned in it were referred to in the charge sheet too. When the CMM asked Malhotra if he had got any fresh instruction after the Tribunal order, he replied in the negative.

The CBI has sought closure of the case on five counts. It said 23 years had passed from the date of the alleged offence and more than 10 years had elapsed after the registration of the case; (b) either all the co-accused had died or proceedings against them had been quashed; (c) the original contract does not provide for any prohibition for employment or non-employment of Indian or foreign agents and full payments in regard to the contract were paid to A.B. Bofors even after the lodging of an FIR and no steps to recover any monies were adopted against them; (d) in view of the judgment of Justice J.D. Kapoor of the Delhi High Court in February 2004, no allegation of corruption or conspiracy with regard to public servants survives; and (e) the attempts to secure the presence of Quattrocchi have failed.

The CMM questioned the bona fides of the CBI in de-freezing Quattrocchi's bank account in London and giving up attempts to get him extradited to face prosecution in the case. I agree that there are certain mala fide intentions in the case and there is no doubt in that, Vinod Yadav observed. He allowed Ajay Agrawal to inspect the judicial file of the case to prepare for his arguments on February 10, when the case is expected to come up for next hearing.

Meanwhile, the ITAT order, which is the first official admission that Bofors paid commissions to its Indian agents to secure the arms deal with the government, has raised the political temperature in New Delhi. The opposition Bharatiya Janata Party is demanding the reopening of the criminal investigations into the Bofors deal.

The ITAT order has brought out the interesting distinction between ascertaining income tax liability and establishing guilt through criminal proceedings. In the former, a tribunal could decide as the ITAT has done on the basis of the material available on record, surrounding circumstances, human conduct and preponderance of probabilities. In the latter, however, the state has to prove the charge against the accused, establishing it beyond doubt.