Delhi High Court grants partial relief to Huawei in income tax proceedings

The Delhi High Court on Monday granted partial relief to Huawei Telecommunications (India), the Indian arm of Chinese tech giant Huawei, in the income tax proceedings (IT) initiated against the company. 

A Division Bench of Justices V Kameswar Rao and Vinod Kumar set aside the IT notice for reassessing Huawei’s revenue for the year 2013-14. It also quashed the directions to conduct a special audit of the company’s accounts for 2013-2014. 

However, the Bench sustained the reassessment proceedings for the years 2015-16 and the orders to conduct a special audit of Huawei’s accounts for the same year. 

The case arose from a 2022 search and seizure operation by the IT Department after which tax authorities sought to reopen assessments for the financial years 2013–14 and 2015–16, and ordered special audits of the company’s accounts under Section 142(2A) of the Income Tax Act. 

The tax department argued that for the year 2013, Huawei’s income had escaped assessment in the nature of receivables for customer claims. For the year 2015-16, the revenue claimed escapement of income was reflected in the form of an “asset”.

It added that the special audit was necessary because the Enterprise Resource Planning (ERP) data provided by Huawei was doubtful and the company had itself conceded that there were duplicate and missing entries. The raw ERP data provided was not sufficient to audit the books of the company and the same has to be reconciled with the financials, the Court was told. 

The submissions were disputed by Huawei which claimed that the special audit notices and the consequential directions were issued without jurisdiction since the ingredients for invoking Section 142(2A) of the Income Tax Act are not satisfied. 

On the reassessment proceedings, Huawei contended that the proceedings were beyond the six-year limitation provided under the law. It was stated that the reasons furnished by the revenue do not disclose any incriminating material indicating escapement of income amounting to ₹50 lakhs or more, represented in the form of an asset.

After considering the case, the High Court ruled that the tax department had sufficient grounds to believe that income had escaped assessment in the form of assets in the year 2015-16 and, therefore, the reassessment proceedings for that year were valid. 

The Court also held that the orders for a special audit of Huawei’s accounts for 2015-16 were valid given the fact that the accounts are voluminous, and there was multiplicity of transactions. 

However, on the reassessment for the years 2013-14, the Division Bench said that orders were invalid as the tax department failed to establish jurisdiction and incriminating material linked to that specific year. 

It added that once the reassessment proceedings have been quashed for the year 2013-14, the special audit directions serve no purpose and would not survive. 

Senior Advocates Arvind Datar and Tarun Gulati with advocates Kishore Kunal, Ankita Prakash and Anuj Kumar appeared for Huawei. 

The Income Tax Department was represented by advocates Indruj Singh Rai, Sanjeev Menon, Rahul Singh, Gaurav Kumar and Siddharth Burman.

[Read Judgment]