Xiaomi Technology India Private Limited Vs DCIT (Karnataka High Court)
Karnataka High Court held the provisional attachment order unjustifiable as the same was passed simply stating that there is likely addition of the amount without mentioning of any valid and cogent reasons.
Facts- The petitioner is a private limited company engaged in the business of procurement, supply and distribution of Xiaomi products in India bearing various brand names including mobile phones, accessories, computers etc., as part of its business, petitioner has to pay royalty to Qualcomm and Beijing Xiaomi mobile software company Ltd.,
During the period from 2019 to March 2022, there were proceedings between the respondents and Income Tax Department and the proceedings in relation to alleged payment of income tax by the petitioner. Meanwhile, the Enforcement Directorate passed a seizure order dated 29.04.2022 seizing the bank accounts of the petitioner to an extent of INR 5,551 crores under the Foreign Exchange Management Act (for short ‘FEMA’). The said order having been challenged by the petitioner in W.P.No.9182/2022, this Court passed an interim order dated 05.05.2022 staying the operation of the seizure order, subject to the condition that the petitioner was not entitled to make payments to foreign entities in the form of royalty or any other form. Subsequently, this Court issued a further clarification on 12.05.2022 that the petitioner was at liberty to take overdrafts and make payments from such overdrafts to foreign entities excluding payment of royalty.
Subsequently, on 11.08.2022, upon obtaining approval from the 3rd respondent, the 1st respondent passed the impugned order under Section 281B of the I.T.Act provisionally attaching the subject fixed deposits of the petitioner in a sum of INR 3,700 crores for a period of six months. Aggrieved by the impugned order, petitioner is before this Court by way of the present petition, which was preferred on 18.08.2022.
Conclusion- A perusal of the impugned order will indicate that except for stating that there is likely addition of the amount mentioned in the order, no reasons, much less valid or cogent reasons are assigned by the 1st respondent as to how and why he has formed an opinion that it was necessary to provisionally attach the fixed deposits of the petitioner for the purpose of protecting the interest of the revenue.
Mere apprehension that huge tax demands are likely to be raised on completion of assessment is not sufficient for the purpose of passing a provisional attachment order and the exercise of the same must necessarily be preceded by the formation of an opinion that it was necessary to do so for the purpose of protecting the interest of Government revenue , that too on the basis of tangible material that the petitioner was not likely to fulfil the demand and on the other hand, was likely to defeat the demand, which is conspicuously missing and absent in the impugned order.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
In this petition, petitioner seeks quashing of the impugned order at Annexure-A dated 11.08.2022 passed by the 1st respondent – Deputy Commissioner of Income Tax under Section 281E of the Income Tax Act, 1961 (for short ‘the I.T.Act’) whereby, pursuant to the approval dated 11.08.2022 of the 3rd respondent – Principal Commissioner of Income Tax, the 1st respondent provisionally attached the subject fixed deposits of the petitioner in a sum INR 3,700 crores viz., i.e. INR 2,600 crores with HSBC Bank and INR 1,100 crores with City Bank.
2. The brief facts rising to the present petition are as under: –
The petitioner is a private limited company engaged in the business of procurement, supply and distribution of Xiaomi products in India bearing various brand names including mobile phones, accessories, computers etc., as part of its business, petitioner has to pay royalty to Qualcomm and Beijing Xiaomi mobile software company Ltd., During the period from 2019 to March 2022, there were proceedings between the respondents and Income Tax Department and the proceedings in relation to alleged payment of income tax by the petitioner. Meanwhile, the Enforcement Directorate passed a seizure order dated 29.04.2022 seizing the bank accounts of the petitioner to an extent of INR 5,551 crores under the Foreign Exchange Management Act (for short ‘FEMA’). The said order having been challenged by the petitioner in W.P.No.9182/2022, this Court passed an interim order dated 05.05.2022 staying the operation of the seizure order, subject to the condition that the petitioner was not entitled to make payments to foreign entities in the form of royalty or any other form. Subsequently, this Court issued a further clarification on 12.05.2022 that the petitioner was at liberty to take overdrafts and make payments from such overdrafts to foreign entities excluding payment of royalty.
2.1 Subsequently, by final order dated 05.07.2022, this Court disposed of W.P.No.9182/2022 by relegating the petitioner to the competent authority i.e., Commissioner of Customs (Appeals) and further directed that the aforesaid earlier interim orders dated 05.05.2022 and 12.05.2022 to continue till disposal of the proceedings.
2.2 Subsequently, in the proceedings before the petitioner before the Transfer Pricing Officer (TPO) in respect of the Assessment Year 2018-19, the petitioner contested the proceedings and filed the detailed submissions with regard to payment of royalty to the foreign entities referred to supra and the said proceedings were pending consideration and on 30.07.2022, the TPO passed an order under Section 92CA (3) of the I.T.Act for the Assessment Year 2018-19 whilst making transfer pricing adjustment. Pursuant to the said order, the Assessing Officer issued a Notice under Section 142(1) of the I.T.Act for the Assessment Year 2018-19 inter alia calling upon the petitioner to show cause, as to why payment of royalty to the foreign entity i.e., Qualcomm and Beijing Xiaomi Mobile should not be disallowed. On 10.08.2022, petitioner submitted a detailed response along with documents and contested the said Notice and proceedings.
2.3 On 11.08.2022, upon obtaining approval from the 3rd respondent, the 1st respondent passed the impugned order under Section 281B of the I.T.Act provisionally attaching the subject fixed deposits of the petitioner in a sum of INR 3,700 crores for a period of six months. Aggrieved by the impugned order, petitioner is before this Court by way of the present petition, which was preferred on 18.08.2022.
2.4 During the pendency of the present petition, the FEMA authorities passed an order dated 19.09.2022 against the petitioner in relation to the aforesaid INR 5,500 crores, which is the subject matter of challenge in W.P.No.19973/2022 pending before this Court, in which, the petitioner has sought for various reliefs including challenging the vires under Section 37A of the FEMA, 1999. In this context, it is relevant to note that there is no interim order passed in favour of the petitioner in the said petition, which is pending adjudication.
3. Heard Sri.Udaya Holla, learned Senior counsel appearing for the petitioner and Sri.M.B.Naragund, learned ASG for the respondents – revenue.
4. In addition to reiterating the various contentions urged in the petition and referring to the material on record, learned Senior counsel for the petitioner made the following submissions: –
(i) That the impugned order passed by the 1st respondent is manifestly arbitrary and reflects premeditated conclusion whilst provisionally attaching the property of the petitioner without recording any opinion as to the necessity for attaching the property.
(ii) The approval granted by the 3rd respondent is also silent and does not make out necessary reasons on the aspect of necessity of attaching the property and does not satisfy the jurisdictional precondition for passing a provisional attachment order.
(iii) The impugned order also does not take into account the doctrine of proportionality comprising of both purpose and necessity to pass an order of provisional attachment. In this context, it is contended that proportionality mandates the existence of a proximate or live link between the need for attachment and the purpose it is intended to secure which is not found / contained in the impugned order.
(iv) The impugned order is also contrary to the judgments of the Apex Court in the case of Radha Krishan Industries vs. State of Himachal Pradesh & Others – (2021) 6 SCC 771, which has been followed by this Court in the case of Indian Minerals and Granite Company vs. DCIT – (2022) 440 ITR 292 (KAR HC) and other judgments of the Apex Court, this Court and other High Courts.
(v) The approval granted by the 3rd respondent does not specify the Document Identification Number (DIN) and is accordingly non est in terms of the CBDT Circular No.19/2019 dated 14.08.2019 which is binding upon the respondents as held by the Apex Court in the case of UCO Bank vs. CIT – (1999) 237 ITR 889 (SC).
(vi) The impugned order has been passed mechanically and based on borrowed satisfaction which do not meet the depth of formation of an opinion of the Assessing Officer as held by various Courts including in the Bombay High Court in the case of PCIT vs. Shodiman Investments ( P) Ltd., – (2020) 422 ITR 337(Bombay).
(vii) The approval granted by the 3rd respondent does not reflect application of mind and the said approval which precedes the impugned order is not a mere formality and is vitiated on this ground. In this regard, reliance is placed upon the judgment of the Apex Court in the case of Chhugamal Rajpal vs. S.P. Chaliha & Others – (1971) 1 SCC 453 and Delhi High Court in the case of United Electrical Company Pvt. Ltd., vs. CIT – (2002) 258 ITR 317.
(viii) Alternatively, it is submitted that the approval of the 3rd respondent is restricted only to royalty payments which constitute 20% of the attached deposits and accordingly, it is necessary to set aside the attachment order in relation to the remaining 80% of the subject fixed deposits.
(ix) Since the provisional attachment order does not contain valid or sufficient reasons as required in law, fresh / new reasons cannot be added or supplemented by the respondents to justify the provisional attachment order. In this regard, reliance is placed on the judgment of the Apex Court in the case of Mohindar Singh Gill vs. Chief Election Commissioner – (1978) 1 SCC 405.
5. Per contra, learned ASG for the respondents – revenue in addition to reiterating the various contentions urged in the statement of objections and referring to the material on record, would support the impugned order and submit that the same does not warrant interference in the present petition which is liable to be rejected and submitted as under:-
(i) The approval granted by the 3rd respondent is only an administrative action which does not require to be communicated to the petitioner and as such, non-quoting of the DIN number in the approval is not required and the same does not invalidate the approval which is otherwise in accordance with law;
(ii) The approval not only refers to attachment of the entire fixed deposits of the petitioner and the same is not restricted to the royalty and accordingly, it cannot be said that the approval by the 3rd respondent is illegal or contrary to law;
(iii) The impugned order contains sufficient and valid reasons and fulfils the parameters laid down by the Apex Court in Radha Krishan Industries’ case (supra) and the petitioner who is guilty of defrauding the respondents and not paying taxes by shifting money outside India is not entitled to any relief in the present petition.
(iv) Apart from the sufficient reasons contained in the impugned order, the other material on record including email correspondence, Investigation reports, findings of the TPO etc., clearly indicate that the petitioner is attempting to reduce the taxable income for the purpose of evading payment of tax and the impugned order does not call for interference on this ground also.
(v) The draft assessment order dated 28.09.2022 for the Assessment Year 2018-19 fully justifies the stance of the respondents as well as the impugned order.
(vi) The various judgments relied upon by the petitioner are not applicable to the facts of the instant case and the details of the tax liability of the petitioner have been correctly recorded in the impugned order which makes out sufficient reasons as to why it was necessary to provisionally attach the fixed deposits for the purpose of protecting the interest of the revenue.
(vii) Learned ASG would reiterate the various contentions urged in the written submissions and contend that in the light of the specific contention of the respondents that the TPO and Investigation Wing have found that the royalty paid by the petitioner was only a mode adopted by it to divert profits outside India, setting aside the impugned order would have the effect of permitting the petitioner to divert profits under the guise of royalty to foreign entities outside India which is detrimental not only to the revenue but also to the country and as such, the impugned order does not warrant interference in the present petition. Reliance is placed on the following judgments: –
(i) Gangamma& Others vs. K.Hanumantha Reddy & Others – RFA 100058/2017 Dated 23.03.2022;
(ii) C. S.Puttaraju vs. State of Karnataka & Others – Crl.P.No.5305/2021 dated 31.01.2022;
8. I have given my anxious consideration to the rival submissions and perused the material on record.
9. Before adverting to the rival contentions and legal position in this regard, it is necessary to state that in the impugned order dated 11.08.2022, after stating the details and particulars as to how a demand was likely to be raised against the petitioner for the reasons mentioned therein, the 1st respondent came to the following conclusions: –
“ 5. As per the above search findings by the investigation wing and the findings of the TPO the likely addition to be made and corresponding tax effect excluding interest is as under:
The estimated additional income is Rs. 33980,08,42,186/- and approximate tax ability of Rs. 10434,69,21,058 (excluding interest) in respect of the assessment years for which the assessment is pending.
6. Apart from the likely demand to be raised mentioned above the assesses will also be liable for interest U/s 234B and Penalty, as per provisions of the Income Tax act which will increase the likely tax dues of the assesses over and above the amount estimated above.
7. As per information received from the investigation wing, the assesses is maintaining fixed deposits of Rs. 3700 crores. The details of the same is as under:
