According to news reports, the Hon’ble Karnataka High Court (HC) has granted significant relief to Xiaomi Technology India Pvt Ltd by setting aside the Income Tax Department’s order to seize the company’s fixed deposits worth Rs 3,700 crore pending assessment.
While setting aside the challenged Order, the Karnataka High Court has stipulated the following three conditions:
i) Xiaomi India shall not be entitled to make payments from the aforementioned fixed deposit accounts to any companies or entities located outside of India in the form of royalty or in any other form.
ii) Xiaomi India is free to take overdrafts from the subject fixed deposit accounts and to use those overdrafts to make payments to companies and entities that are located outside of India.
iii) The Income Tax Department has been instructed to finish the Xiaomi India’s draft assessment proceedings for the Assessment Years 2019-20, 2020-21, and 2021-22 on or before March 31, 2023, at the latest.
Earlier, the Income Tax Department had passed the seizure Order on the grounds that the Chinese company was remitting income abroad under the guise of paying royalty with the intention of avoiding paying taxes in India.
However, the Karnataka High Court has found several flaws in the impugned Order that was issued by the Income Tax Department. The court also noted in the judgement that there is no finding recorded as to why a provisional order of attachment had to be passed against Xiaomi India. In addition, there is no finding that has been documented indicating that Xiaomi India was a “fly-by-night operator” from which it was not likely to recover the likely demand.
Quashing the order, the Karnataka High Court stated that the mere apprehension of huge tax demands that are likely to be raised on completion of assessment was not sufficient to constitute formation of opinion and existence of proximate and live link for the purpose and necessity of provisional attachment which implicate the doctrine of proportionality, in the absence of any reasons as to why and how the demand would be defeated by the Xiaomi India.