Air India said it has adjusted its in-flight alcohol service policy in the wake of a mid-air urination scandal that has cost the carrier over $40,000 in fines.

The incident, in which a drunk senior US bank executive was accused of urinating on a 72-year-old woman seated in business class on a flight last year from New York to New Delhi, has been dubbed "peegate" by local media.

The airline has faced severe criticism for its handling of the woman's complaint and for allowing the banker, Indian national Shankar Mishra, to disembark as normal when the aircraft landed.

But Air India defended itself in a statement on Tuesday, saying "in the judgement of the crew, the alleged perpetrator posed no risk to flight safety at any time".

"The alleged perpetrator was calm, co-operative and professed ignorance of the allegation. He had not been served excessive alcohol by crew and did not appear intoxicated to the crew," the statement added.

The airline did acknowledge, however, its failure to report the incident, which took place on November 26, as required by the Indian aviation regulator.

The Indian Directorate General of Civil Aviation (DGCA) last week fined Air India three million rupees ($37,000), and the airline's director of in-flight services an additional 300,000 rupees.

The flight's pilot also had his licence suspended for three months for "failing to discharge his duties" to ensure safety and discipline.

The airline has since called the penalty "excessive" and vowed to help its staff mount an appeal.

The DGCA on Tuesday imposed an additional fine of one million rupees on the airline for failing to report two more incidents of unruly passenger behaviour on a separate flight from Paris to New Delhi on December 6.

On that occasion, an allegedly drunk passenger was found smoking in the lavatory, while another relieved himself on the vacant seat and blanket of a fellow female passenger, the regulator said.

"We have reviewed our existing in-flight alcohol service policy taking reference from other carriers’ practice and input from the US National Restaurants Association’s guidelines," Air India said in a statement.

The airline will now adopt the NRA's "traffic light" system to train crew members to recognise and manage possible cases of intoxication, Air India said.

The incidents have led to the first major public relations crisis at the former flag carrier since its privatisation last year.