Karnataka High Court Quashes Provisional Attachment Of Fixed Deposits Worth Rs. 3700 Crores Against Xiaomi

The Karnataka High Court has quashed the provisional attachment of fixed deposits worth Rs. 3700 crores against Xiaomi.

The single bench of Justice S.R. Krishna Kumar has quashed the provisional attachment of the fixed deposit subjected to various conditions.

The court ordered that Xiaomi shall not be entitled to make payments from the fixed deposit accounts in the form of royalties or in any other form to any companies or entities located outside India. Xiaomi, on the other hand, is free to take out overdrafts from fixed deposit accounts and make payments from overdrafts to companies or entities based outside of India.

The court directed the department to complete the draft assessment proceedings of the petitioner for the assessment years 2019–20, 2020–21, and 2021–22 on or before March 31, 2023.

The petitioner, Xiaomi, is a private limited company engaged in the business of procurement, supply, and distribution of Xiaomi products in India under various brand names, including mobile phones, accessories, computers, etc. As part of its business, the petitioner has to pay royalties to Qualcomm and Beijing Xiaomi Mobile Software Company Ltd.

During the period from 2019 to March 2022, there were proceedings between the respondents and the Income Tax Department, and the proceedings related to the alleged payment of income tax by the petitioner.

Meanwhile, the Enforcement Directorate passed a seizure order dated April 29, 2022, seizing the bank accounts of the petitioner to an extent of INR 5,551 crores under the Foreign Exchange Management Act (FEMA). The order having been challenged by the petitioner, the court passed an interim order 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, the Court issued a clarification on May 12, 2022, that the petitioner was at liberty to take overdrafts and make payments from such overdrafts to foreign entities, excluding the payment of royalty.

On August 11, 2022, upon obtaining approval from the Principal Commissioner of Income Tax, the Deputy Commissioner of Income Tax passed the order under Section 281B provisionally attaching the subject fixed deposits of the petitioner in a sum of INR 3,700 crores for a period of six months.

The petitioner contended that the order passed by the respondent was manifestly arbitrary and reflected a premeditated conclusion while provisionally attaching the property of the petitioner without recording any opinion as to the necessity for attaching the property.

The department contended that, apart from the sufficient reasons contained in the order, the other material on record, including email correspondence, investigation reports, findings of the TPO, etc., clearly indicated that the petitioner was attempting to reduce the taxable income for the purpose of evading payment of tax.

The court held that in the interest of justice, it would be just and appropriate to direct the petitioner not to make payment in the form of royalty or any other form to any entities outside India till the conclusion of assessment proceedings by the respondents. However, the petitioner's right to take overdrafts on the subject fixed deposits and make payments from overdrafts from the respective banks to foreign entities would also serve the interests of justice.

Case Title: Xiaomi Technology India Pvt. Ltd.

Citation: Writ Petition No.16692 Of 2022(T-IT)

Date: 16.12.2022

Counsel For Petitioner: SRI.UDAYA HOLLA, SENIOR ADVOCATE FOR SRI.DEEPAK CHOPRA, SRI.ADITYA VIKRAM BHAT, SRI. HARPREET SINGH AJMANI, SRI.SHRAVANTH ARYA, MS.V.RADHIKA AND SRI. MITHEL REDDY, ADVOCATE

Counsel For Respondent: SRI.M.B.NARAGUND, ASG ALONG WITH SRI.K.V.ARAVIND AND SRI.M.DILIP, ADVOCATES

Citation: 2022 LiveLaw (Kar) 524 

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