Xiaomi Tax Evasion Case: Karnataka High Court Dismisses Rs 3,700 Crore Attachment Order
The high court found the tax department's attachment order to be illegal, arbitrary and contrary to law.
The Karnataka High Court has set aside a Rs 3,700 crore attachment order passed by the Income Tax department on Xiaomi Technology India Pvt.’s fixed deposit accounts.
The order, however, is conditional and prevents the company from making any payment, royalty etc to entities located outside India from such accounts. Xiaomi, however, is free to obtain an overdraft on such a fixed deposit to make any payments outside of royalty.
In August this year, the income tax department provisionally attached the fixed deposit accounts of Xiaomi India on grounds of attempted tax evasion. The company is attempting to reduce its taxable income in India by paying royalties to entities located outside, the tax department had alleged.
The department investigated the company between 2019 and 2022; after which it asked Xiaomi India to explain why royalty payments to foreign entities must not be disallowed. Unsatisfied with the company's response, the department passed an attachment order against its fixed deposit accounts with several banks.
Xiaomi India, a company engaged in the supply and distribution of Xiaomi products in India, has to pay royalties to Qualcomm and Beijing Xiaomi Mobile Software Company Ltd. as part of its business. It contested the order, saying the department had failed to provide the necessary reasons for the attachment and also failed to take into consideration the concept of proportionality since only 20% of the attached deposits constitute royalty payments.
The department responded by saying the attachment is not restricted to royalty payments. It is passed in view of the fact that the company is trying to divert its profits outside the country under the guise of royalty.
The high court disagreed with the department, calling its order “illegal, arbitrary, and contrary to law and deserves to be quashed.” The department has failed to provide sufficient reasons that warranted the attachment of the account, the court said. Mere apprehension that huge tax demands are likely to be raised on completion of the assessment is not sufficient for the purpose of passing a provisional attachment order, the high court concluded.
"...there is no finding recorded as to why a provisional order of attachment had to be passed against the petitioner [Xiaomi India]; it is significant to note that there is no finding recorded by the Deputy Commissioner that the petitioner was a ‘fly by night operator’ from whom it was not possible to recover the likely demand.Karnataka High Court
In yet another proceeding before another bench of the Karnataka High Court, Xiaomi India has challenged a Rs 5551 crore attachment order passed by the Enforcement Directorate under the Foreign Exchange Management Act, which was passed during the pendency of this case. That seizure order has been stayed by the high court on the condition that no royalty payments can be made by the company to foreign entities.
