Govt reveals details about Income Tax Department raids on mobile manufacturing companies

The Income Tax Department has finally provided some details about the raids carried out on some of the major smartphone manufacturers in India. The search and seizure operations were carried out pan-India on December 21. According to the IT department, these organisations were foreign-controlled Mobile Communication & Mobile Hand-set Manufacturing Companies. The raids were conducted in the states of Karnataka, Tamil Nadu, Assam, West Bengal, Andhra Pradesh, Madhya Pradesh, Gujarat, Maharashtra, Bihar, Rajasthan, Delhi & NCR. So far, the govt hasn’t named any names. Earlier reports suggested that the raids were conducted on OnePlus, Xiaomi and Oppo India offices.

According to a statement by the Ministry of Finance, the raids revealed that two major companies have made remittance in the nature of royalty, to and on behalf of their group companies located abroad, which aggregates to more than Rs 5500 crore. The ministry says the claim of such expenses does not seem to be appropriate in light of the evidence gathered during the raids.

The search operation has also brought out the modus operandi of purchase of the components for manufacturing of mobile handsets. The govt claims that both these companies had not complied with the regulatory mandate prescribed under the Income-tax Act, 1961 for disclosure of transactions with associated enterprises. The companies are liable for penal action under the Income-tax Act, 1961, with a fine in the range of more than Rs 1000 crore.

Further search revealed that foreign funds have been introduced in the books of the Indian company but it transpires that the source from which the funds have been received are of doubtful nature. The borrowings have been estimated at around Rs 5000 crore, on which interest expenses have also been claimed.

Inflation of expenses, payments on behalf of the associated enterprises, etc. have also been noticed which led to the reduction of taxable profits of the Indian mobile handset manufacturing company. The amount could be in excess of Rs 1,400 crore.

It is further found that one of the companies utilized the services of another entity located in India but did not comply with the provisions of tax deduction at source introduced with effect from April 2020. The quantum of liability of TDS on this account could be around Rs 300 crore.

In case of another company covered in the search action, it has been detected that the control of the affairs of the company was substantively managed from a neighbouring country. The Indian directors of the company admitted that they had no role in the management of the company and lent their names for directorship for namesake purposes. Evidence has been gathered on an attempt to transfer the entire reserves of the company to the tune of Rs 42 crore out of India, without payment of due taxes.

Survey action in the case of certain fintech and software services companies have revealed that a number of such companies have been created for the purposes of inflating expenses and siphoning out of funds. For this purpose, such companies have made payments for unrelated business purposes and also utilized the bills issued by a Tamil Nadu-based non-existent business. The amount of such out-flow is found to be around Rs 50 crore.

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