ED is said to freeze $478 million worth of Xiaomi funds during its investigation into alleged tax evasion

According to a court filing reviewed by two sources and Reuters, Indian tax officials in February deposited $478 million (about Rs 3,699 crore) into local bank accounts of Xiaomi in China.

Fund freeze by tax authorities, being first reported by Reuters, comes as another legal dispute over the top of the Chinese smartphone giant Xiaomi A block on $725 million (about Rs 5,624 crore) of its funds by another Indian enforcement agency for alleged illegal foreign remittances faces a challenge it faces – successfully so far.

In the Income Tax case, the officials have paid around Rs. 3,699 crore in February under a legal provision that allows authorities to take such action to protect New Delhi’s revenue interests, a Xiaomi court document showed.

Xiaomi did not respond to a request for comment.

An Income Tax Department spokesperson declined to comment.

Two sources with direct knowledge said the amount blocked by tax inspectors was the result of raids conducted in December at Xiaomi India offices for alleged income tax evasion.

The investigation, one of the sources said, alleges that the Chinese company out of its contract bought smartphones in India at inflated costs, allowing it to record a small profit by selling to customers and evading corporate income taxes.

It is not clear whether the company appealed against the decision.

The freeze was cited by the Income Tax Department in a court filing by Xiaomi on May 4 in southern Karnataka state, where it is challenging the seizure of another bank account by the Enforcement Directorate, a federal crime-fighting agency, in the royalty case .

The directorate says that Xiaomi illegally made foreign remittances to certain entities “under the guise of royalty” even though it did not receive any service from them, a charge the company denies. On the appeal of Xiaomi, the Indian court has stayed the decision of the directorate till 23 May.

Referring to the two investigations, Xiaomi said in its court document that it has “cooperated with each of these investigations and provided all necessary information.”

Xiaomi said in its filing that India’s Income Tax Department by an order dated February 18, 2022 placed $478 million (about Rs 3,699 crore) of its deposits “under lien”.

Chinese companies have struggled to do business in India since 2020, when the two countries clashed on the border. India has since cited security concerns in banning more than 300 Chinese apps, including popular ones such as TIC TocAnd stricter norms for Chinese companies investing in India.

Xiaomi recently made headlines with allegations that its executives faced intimidation from officials of the Indian Directorate, public rebuttals from the agency and words of support from the Chinese government.

According to Counterpoint Research, Xiaomi quadrupled its share of the Indian smartphone market from just 6 percent in 2016 to 24 percent last year, making it the market leader.

© Thomson Reuters 2022

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