I-T order against Xiaomi India ‘arbitrary’: Karnataka High Court orders release of FD worth ₹3,700 crore

Karnataka High Court has quashed the income tax department's block on China-based Xiaomi Corp's fixed deposits worth ₹3,700 crore. The order, according to Justice SR Krishna Kumar, was arbitrary and revealed a preconceived conclusion without expressing an opinion or a need to seize 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,” said Justice Kumar.

However, the court ordered the company to stop paying any royalties or other payments to any foreign organisation until the assessment processes are over, taking into account the accusations brought against it.

The interests of justice would also be served if the petitioner was permitted to take out or obtain overdrafts on the relevant fixed deposits and make payments to foreign entities from those overdrafts in conformity with the law from the relevant institutions, Bar and Bench quoted the court as saying.

Due to allegations that Xiaomi was engaging in the practice of transferring earnings outside of India and paying foreign organisations under the pretence of royalties, the seizure was mandated. The court decided that the requirement for an attachment and its intended use must be directly related via a live link under the proportionality concept.

“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,” said Justice Kumar.

Indian tax officials froze the funds in February as part of an investigation into alleged tax evasion. The investigation concerned allegations that the Chinese company purchased smartphones from its contract manufacturers at inflated costs in India, allowing it to record a smaller profit by selling them to customers and evading corporate income taxes, Reuters reported in May.

The fund freeze by income tax authorities was on top of another legal tussle Xiaomi faces where it has challenged a block on $666 million of its funds by India's federal financial crime fighting agency for alleged illegal foreign remittances.