Karnataka HC sets aside Rs.3700 crore Income Tax’s seizure order against Xiaomi

The Karnataka High Court has overturned Income Tax’s order to seize Rs 3,700 crore of the company’s fixed deposits, which is a significant relief for Xiaomi Technology India Pvt Ltd.

The order of seizure of the Deputy Commissioner of Income Tax dated August 11, 2022 was set aside under three conditions by Justice S R Krishna Kumar in his ruling on December 16.

“Xiaomi shall not be authorised to make payments from the subject fixed deposits accounts in the form of royalties or in any other manner to any companies / entities situated outside India,” according to the first condition.

As for the second condition, Xiaomi is “free to obtain overdrafts from the subject fixed deposits accounts and make payments from such overdrafts to such firms / entities located outside India.”

Thirdly, it was “ordered to finish the draft assessment proceedings of the petitioner for the Assessment Years 2019–20, 2020–21, and 2021–22 on or before March 31, 2023” by the Income Tax Department.

The decision was issued by the IT Department on the grounds that the Chinese corporation was remitting income abroad under the guise of paying royalties in order to avoid paying tax in India.

A similar order by the ED to freeze Rs 5,551 crore was challenged in court. On November 17, the court reserved decision in the ED case, which is still pending. The court discovered significant flaws in the IT case.

“A perusal of the impugned order will also show that no finding was recorded as to why a provisional order of attachment had to be passed against the petitioner; it is significant to note that there is no finding recorded by the first respondent that the petitioner was a ‘fly-by-night operator’ from whom it was not likely to recover the likely demand,” the court said.

The order was quashed, according to the HC “In other words, in the absence of any reasons why and how the petitioner’s demand would be defeated, mere fear that huge tax demands would be raised upon completion of assessment was insufficient to constitute formation of opinion and existence of proximate and live link for the purpose and necessity of provisional attachment, which implicates the proportionality doctrine. Under these circumstances, I am also of the considered judgement that the contested order should be quashed.”