National auditor CAG today raised questions over a USD 2.1 billion Indian Navy contract awarded to Boeing during the previous UPA regime, suggesting the American defence major was favoured over rival bidder EADS CASA of Spain for procuring a fleet of P-8I maritime reconnaissance aircraft.

In its report tabled in Parliament, the Comptroller and Auditor General (CAG) said the defence ministry enhanced the financial bid of Spanish aerospace firm to provide for a 20 year "product support" cost on assumption that Boeing's offer had similar provision.

Boeing, at a later stage, offered the aircraft maintenance support under a separate negotiable contract, the auditor said, while terming as incorrect the conclusion that the American company was the lowest bidder (L1).

It said enhancing the financial bid of the Spanish company by including its product support cost resulted in pushing it to L-2 status (second lowest bidder). As per the report, the contract was concluded with Boeing in January 2009 at USD 2.1 billion (about Rs 14,500 crore at the current exchange rate).

"At a later date, Boeing, USA, offered the product support under a separate negotiable contract and consequently the deduced ranking of Boeing, USA as L-1 turned out to be incorrect," it said.

The CAG observed that the American aircraft was not "fully meeting" the needs of the Indian Navy, mainly due to limitations of radars installed onboard the aircraft.

The national auditor said the defence ministry had set the offset obligation by Boeing at USD 641 million (Rs 3,127.43 crore).

The CAG said Boeing is yet to fulfil the offset obligations, which was to be met by August 2016. "Boeing, USA had claimed offset credits on mere placement of purchase orders defeating the very purpose of offset obligations," it observed.

Under India's offset policy, foreign defence entities are mandated to spend at least 30 per cent of the total contract value in India through procurement of components or setting up of research and development facilities.

The 2009 deal was for eight P-8I (Poseidon Eight India) aircraft. The first aircraft came to India in May 2013 and all the eight aircraft have been fully integrated into Indian Navy's operations.

The P-8I aircraft is a variant of the P-8A Poseidon aircraft that Boeing developed as a replacement for the US Navy's ageing P-3 fleet.

Indian Navy became the first international customer for the aircraft which is equipped for long range anti submarine warfare, anti-surface warfare and surveillance. The CAG also criticised delays in procuring bombs as part of the weapons for the aircraft.