I-T dept says two major mobile companies have not complied with regulatory mandate

Following search and seizure operations conducted across offices and premises belonging to “foreign-controlled” mobile manufacturing companies, the Income Tax department has revealed that two major companies “have made remittance in the nature of royalty, to and on behalf of its group companies located abroad, which aggregates to more than Rs 5500 crore”.

“The claim of such expenses does not seem to be appropriate in light of the facts and evidence gathered during the search action,” the IT department said in an official statement.

The raids were carried out in premises belonging to these mobile companies in Karnataka, Tamil Nadu, Assam, West Bengal, Andhra Pradesh, Madhya Pradesh, Gujarat, Maharashtra, Bihar, Rajasthan, and Delhi & NCR.

The statement also mentioned that the search operation revealed the “modus operandi of purchase of the components for manufacturing of mobile handsets”, and adds that the two companies have not compiled with the regulatory mandate that is prescribed under the Income-tax Act, 1961. “Such lapse makes them liable for penal action under the Income-tax Act, 1961, the quantum of which could be in the range of more than Rs 1,000 crore,” it said.

Additionally, the search also revealed the modus operandi by which “foreign funds have been introduced in the books of the Indian company but it transpires that the source from which such funds have been received are of doubtful nature, purportedly with no credit worthiness of the lender” and that “the quantum of such borrowings is about Rs 5,000 crore, on which interest expenses have also been claimed”.

It also alleges that expenses and payments on behalf of the associated enterprises have been inflated leading to the reduction of taxable profits of the Indian mobile handset manufacturing company. And this 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 w.e.f. 01.04.2020.  The quantum of liability of TDS on this account could be around Rs.300 crore,” the IT department said.

For one of the two companies, it was found that the control of affairs was “substantively managed” from a “neighbouring country”. “The Indian directors of the said company admitted that they had no role in the management of the company and lent their names for directorship for namesake purposes. Evidences have been gathered on attempt to transfer the entire reserves of the company to the tune of Rs 42 crore out of India, without payment of due taxes,” the release states.

Separately, 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 concern.  The quantum of such out-flow is found to be around Rs 50 crore,” the department said in its statement.

It added that further investigations are currently in progress.

While the press statement did not name any of the companies, raids were carried out at Oppo and Xiaomi offices and factories, among others, earlier this month and both companies had told Business Today that they were fully cooperating with the concerned authorities.

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