Karnataka High Court sets aside IT department's ₹3,700 crore provisional attachment order against Xiaomi India

The Karnataka High Court recenlty set aside an order of the Income Tax Department provisionally attaching Xiaomi India’s fixed deposits amounting to ₹3,700 crore for a period of six months [Xiaomi Technology India v. Deputy Commissioner Of Income Tax]..Justice SR Krishna Kumar found that the order was arbitrary and reflected a premeditated conclusion without recording either an opinion or necessity to attach the property.“I am of the view that the impugned order passed by the 1st respondent is illegal, arbitrary and contrary to law and the same deserves to be quashed,” held the single-judge..However, taking into consideration the allegations made against the company, the Court directed it to refrain from making royalty or any other payments to any entity outside the country till the assessment proceedings conclude.“However, interest of justice would also be met if the petitioner is reserved liberty to take/obtain overdrafts on the subject fixed deposits and make payments from such overdrafts from the respective banks to foreign entities in accordance with law,” the Court clarified..The seizure was ordered in light of an allegation that Xiaomi was indulging in diverting profits outside India and making payment to foreign entities under the guise of royalties..The Court held that the doctrine of proportionality mandates the existence of a proximate or a live link between the need for attachment and its purpose.“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.”.Xiaomi had contended that the order did not record any opinion as to the necessity of attaching the property. It was the company's stand that since the order did not contain valid or sufficient reasons, new grounds could not be added to justify its issuance.On the other hand, the income tax authorities argued that apart from sufficient reasons in the order, other material on record clearly indicated that Xiaomi was attempting to reduce taxable income for the purpose of evading payment of tax..The Court, after hearing both parties, opined that there were no valid or cogent reasons as to why the authorities formed an opinion that it was necessary to provisionally attach the fixed deposits for the purpose of protecting the interest of the Revenue.“The impugned order also discloses that the same has been passed mechanically and is based on borrowed satisfaction and does not meet the test of formation of an opinion of the Assessing Officer,” Justice Kumar found.Therefore, the order was set aside..Nonetheless, the Court noted that specific contentions of the tax department as well as Foreign Exchange Management Act (FEMA) authorities could not be glossed over. Thus, conditions regarding payments outside the country were imposed on Xiaomi India.The judge further added that the authorities must complete the draft assessment proceedings on or before March 31, 2023..Senior Advocate Udaya Holla and Advocates Deepak Chopra, Aditya Vikram Bhat, Harpreet Singh Ajmani, Shravanth Arya, V Radhika and Mithel Reddy appeared for Xiaomi.The income tax authorities were represented by Additional Solicitor General MB Nargund and Advocates KV Aravind and M Dilip..Earlier this year, Xiaomi had moved the High Court challenging a provisional attachment order passed by the Enforcement Directorate freezing 5,551.27 crore in its bank accounts.The agency had contended that the company had contravened provisions of the FEMA by making unauthorised payments to foreign companies situated outside India.The Court had held that the petition was premature and directed Xiaomi India to approach the Commissioner of Customs (Appeals) for relief, while clarifying that its earlier order staying the operation of the ED's seizure order would continue..[Read Order]