Xiaomi funds worth $478 million were reportedly frozen by ED during an alleged tax evasion investigation

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According to two sources and a court filing checked by Reuters, Indian tax officials removed $478 million in deposits in February in an investigation into alleged tax evasion.

The freeze of funds by tax authorities, first reported by Reuters, comes on top of another legal battle faced by Chinese smartphone giant Xiaomi, in which it has – so far successfully – blocked a $725 million (approx Rs. 5,624 crore) has challenged his funds by another Indian law enforcement agency over alleged illegal overseas transfers.

In the income tax case, authorities blocked approximately Rs. 3,699 crore in February under a legal provision allowing officials to take such measures to protect New Delhi’s revenue interests, a Xiaomi court document showed.

Xiaomi did not respond to a request for comment.

A spokesman for the tax office declined to comment.

Two sources with direct knowledge said the amount blocked by tax inspectors was a result of December’s raids on alleged tax evasion at Xiaomi India’s offices.

That investigation, according to one of the sources, concerns claims that the Chinese company bought smartphones from its contract manufacturers at inflated costs in India, allowing it to make less profit by selling them to customers and avoiding corporate taxes.

It’s not clear if the company has appealed the decision.

The IRS freeze was cited by Xiaomi in a May 4 court filing in the southern state of Karnataka, where it challenges the other seizure of bank accounts by the federal crime enforcement agency, the Enforcement Directorate, in the royalties case.

The directorate says Xiaomi has illegally made overseas transfers to certain companies “under the guise” of royalties even though it has not engaged any services from them, an allegation the company denies. The Indian court has stayed the directorate’s decision on Xiaomi’s appeal until May 23.

Referring to the two investigations, Xiaomi states in its court document that it “cooperated with each of these investigations and provided all necessary information”.

India’s Income Tax Agency “pledged” US$478 million (approximately Rs.3,699 billion) of its deposits with an order dated February 18, 2022, according to Xiaomi in its filing.

Chinese companies have struggled to do business in India since 2020, when a border dispute erupted between the two nations. India has cited security concerns as it has since banned more than 300 Chinese apps, including popular ones like TikTok, and tightened norms for Chinese companies investing in India.

Xiaomi recently made headlines with allegations that its executives were intimidated by officials at the Indian Directorate, prompting public rebuttals from the agency and words of support from the Chinese government.

According to Counterpoint Research, Xiaomi has quadrupled its share of the Indian smartphone market from just 6 percent in 2016 to 24 percent last year, making it the market leader.

© Thomson Reuters 2022

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