Vaibhav Gupta and Varun Matlani

Introduction

Vivo Mobiles India Pvt. Ltd. (Vivo), on 5th July, 2022 witnessed Enforcement Directorate (ED) at its 48 locations across India over the charge of illegally remitting over Rs. 62,476 Crores to China, thereby artificially deflating their profit and loss causing net loss in their statements to Income Tax Department to employ tax-loss harvesting totalling to Rs. 2826 crores. ED in response, freezed assets and bank accounts of Vivo to the tune of Rs. 465 crores lying in around 119 bank accounts of related parties under the powers vested as per Section 17 (1A) of Prevention of Money Laundering Act, 2002 (PMLA) and Section 132 of the Income Tax Act, 1961 (powers granted for search and seizure)

The Delhi High Court on 8th July admitted the writ petition filed by Vivo, in the next order delivered by Justice Yashwant Varma in W.P.(C) 10382/2022, Vivo Mobile India Pvt. Ltd. v. Directorate of Enforcement on 13th July, 2022 accepted the contention of Vivo to provide for bank guarantee of Rs. 950 crores in addition to the freezed amount of Rs. 251 Crores, thereby safeguarding the claims of ED in return of diligently being allowed to use their bank accounts and the details of such usage be informed to ED on 48 hourly basis.

Alleged Modus Operandi

As per ED, Vivo deployed the technique of tax-loss harvesting by creating multiple shell/ dormant companies which were used to transfer its revenue domestically and further back-tracked them to China causing loss to Indian exchequer. It was also alleged that the officials at Vivo did not cooperate with ED.

It is contended that the relevant provisions of Section 92A-F and relevant rules of Income Tax Act with respect to transfer pricing, i.e. a mechanism that ensures related-party transactions are equated pari-passu with unrelated transactions, thereby appropriately and fairly estimating the due taxation amount(s).

Relevant Provisions

The prima facie incident of crime can be presumed to be that of tax evasion through concealment and non- compliance with applicable methods of transfer pricing enshrined vide Section 92 A-F of Income Tax Act which provides for computation of Arm’s Length Price with domestic or cross border transactions with associated enterprises. As per Section 271 C of Income Tax Act whereby concealment of original earnings or real revenue can lead to a penalty of upto 100 to 300% of the tax evaded.

ED has taken the ambit of Prevention of Money Laundering Act to frame the charge of passing revenues of Vivo through allegedly 23 companies across India, thereby making the untaxed money pass through various channels and remitting these to China- whereby this whole act is considered Money laundering as per Section 3 of PMLA, defrauding the central government vide Ministry of Corporate Affairs (MCA) and Income Tax authorities through such dubious shell companies has attracted for Vivo Section 120B, 417 and 420 of the Indian Penal Code, 1860. It might also be inferred that the relevant provisions of Benami Transactions Prohibition Act, 2016 be attracted towards these transactions as they are prima facie dubious and fictitious in nature with Vivo being real beneficiary.

Evolution of ‘Search & Seizure’ Jurisprudence

Through the initial submissions, Vivo contends that the procedure established by law was violated, specifically the search and seizure procedures which in accordance with the reported Sections of relevant provisions as per ED press note were ultra-vires, the prima facie issue is whether the bank accounts so freezed can be legally brought within the wider ambit of information that is not disclosed/secreted and/or hidden since these are the preliminary information which Vivo supposedly submits but also in relation to Vivo, the banks shall have to submit as a regulatory mechanism reporting to the Income Tax Department.

The guiding principle of this argumentation can be derived from Allahabad High Court’s judgement in Motilal & Ors. v. Preventive Intelligence Officer (upheld by Supreme Court in Commissioner of Income Tax v. Tarsem Kumar), Delhi High Court’s judgement in L.R. Gupta & Ors. v. Union of India and Punjab High Court judgement on H.L. Sibal v. Commissioner of Income Tax.

In Motilal case, Motilal and brothers were silver merchants, in operative proceedings of Customs and Central excise Department, sizeable quantity of silver was seized, this seizure was officially notified to the merchants. Further on, the fresh case was filed by Income tax department and new proceedings were started against them specifically towards attaining the silver bullions so seized by excise department. These proceedings were like in the present case within the ambit of Section 132 (1) of the Income Tax Act, 1961. It was held by Allahabad High Court that the proceedings of search and seizure under the said Section can be essentially towards assets that are not disclosed/secreted and/or hidden and not towards specifically disclosed assets which the court considered in this case to be the silver bullions since the information for the same was officially recorded by the excise department thereby the use of aforesaid mentioned Section being rendered invalid. This case was in principle upheld to the extent of disclosure invalidating the usage of said Section.

In H.L. Sibal case, it was held that searches made under Section 132 are particularly towards those in possession of undisclosed incomes or assets and that this power has to be exercised in an honest manner and search warrants cannot be indiscriminately issued purely as a matter of policy.

The contentions here in lines of Vivo case are that the bank accounts are not hidden from any authority and thereby not something that are in a secret vacuum of undisclosed data, an unknown factor whether the accounts so freezed were directly owned by Vivo or by the alleged shell companies, in the former case the accounts cannot be deemed undisclosed or something that government was completely unaware of, since the reporting of this information is prima facie done by banks under the ambit of applicable regulatory frameworks, however in the latter case scrupulous veil over the shell companies’ bank accounts even though the same may have been reported but conclusively in respect to this case being incomprehensive information in furtherance of alleged motive of money laundering could have been brought within the ambit of Section 17 (1A) of PMLA and/or Section 132 (1) of the Income Tax Act.

Also, Vivo claims that companies’ existence itself cannot be criminal but this fundamentally is against the Supreme Court’s judgement in Standard Chartered Bank v. Directorate of Enforcement which states the principle that company can have criminal liability in form of fines and penalties in cases where it is criminally liable and cannot escape the same even on the ground that a company has no Mens Rea.

Specifically, the cases of shell companies can be even on existential ground be criminal since prima facie intention of these companies is to commit fraud on Indian laws, in accordance with Section 5 of PMLA, ED has authority to seize ‘proceeds of crime’ which is defined under Section 2 (u) that covers the ambit of scheduled offences as well as transferring such illegal proceeds out of India, both of which are alleged by ED in the present case.

Conclusion

Through this article, the authors intend to provide legal aspect from both the sides of the case whereby this case can be considered essential in developmental jurisprudence of understanding the grey areas of distinction in operation of law by enforcement agencies in terms of search and seizure operations where prima facie the liquidity is in legal form in the economy but the tools are so deployed so as to evade taxes or commit fraud on Indian laws. It has been a generalised presumption that multiple shell companies do not show clean hands of the parent holding especially when in such a case whereby the directors have fled the country, also Indian enforcement agencies need to have a broader perspective of the powers conferred upon them for instance, the preliminary ground of search and seizure operations under Section 17 (1A) of PMLA and Section 132 (1) of Income Tax Act could have been avoided had the operation been under the ambit of Section 222 and 226 (5) of Income Tax Act which provides for similar power but in a slightly restrictive manner. The ingredients of this case would have a deep imprint in Indian jurisprudence since a sizeable quantum of India’s foreign based companies back-track money to their parent country or their registered tax-haven countries. Also, specifically India’s continued sweet and sour Chinese relations would have an impact since the trail just jumps from one company to other like from Xiaomi to Vivo and with Oppo next on the radar, development in this case would lay a significant political risk assessment parameter for Chinese companies’ investment in Indian markets.

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