I-T dept detects tax evasion by Chinese firm Huawei

The Income Tax (I-T) department has detected tax evasion by Chinese firm Huawei by suppressing income to the tune of Rs 400 crore by stating lower margins and making Rs 350 crore royalty payments to related parties for unsubstantiated services, sources said.

The I-T department had conducted search and seizure operations on the Huawei group, engaged in the distribution of telecom products and providing captive software development services, on February 15.  The searches, which were spread across Delhi, Gurugram and Bengaluru covered the main business premises and also the residential premises of the key office-bearers. 

Evidence gathered and statements recorded during the search also revealed that one of the group entities engaged in providing software development services, has been disclosing lower net margins from the related parties, by claiming its operation to be of low-end nature. “However, the evidence collected during the investigation indicated that this entity has been rendering significant services/operations of high-end nature. On this aspect, suppression of income of Rs 400 crore has been detected,” the finance ministry said in a statement. However, the ministry did not name the company.

During the search, it was found that the assessee group has also debited more than Rs 350 crore in its books of account in recent financial years towards royalty to its related party. Such expenses have been incurred for the use of brand and technical know-how related intangibles. “The group has failed to substantiate receipt of any such services/technical know-how, or the basis of quantification of royalty rate for such claim. Consequently, the rendering of services and such royalty payments become highly questionable and prima facie, disallowable as business expenses as per extant Income Tax law,” the ministry said.

The search action has also revealed that the group has made inflated payments against receipt of technical services from its related parties outside India. The assessee company could not justify the genuineness of obtaining such alleged technical services in lieu of which payment has been made as also the basis of determination of consideration for the same. The expenses debited by the assessee company towards receipt of such services are to the tune of Rs 129 crore over a period of five years, it added.

The ministry said that the group has manipulated its books of account to reduce its taxable income in India through the creation of various provisions for expenses, such as provisions for obsolescence, provisions for warranty, doubtful debts/ loans & advances, etc., which have little or no scientific/financial rationale. During the investigation, the group has failed to provide any substantial and appropriate justification for such claims.