Income Tax department froze Rs 3,703 crore of Xiaomi funds in February

Income tax officials froze Rs 3,703 crore ($478 million) worth of deposits lying in local bank accounts of China's Xiaomi Corp in February as part of an investigation into alleged tax evasion, according to two sources and a court filing reviewed by Reuters.

The fund freeze by tax authorities, being reported for the first time by Reuters, comes on top of another legal tussle Chinese smartphone giant Xiaomi faces where it has challenged - successfully so far - a block on Rs 5,616 crore ($725 million) of its funds by another Indian enforcement agency for alleged illegal foreign remittances.

Also Read | Xiaomi's legal battles in India as ED, I-T officials probe business practices

In the income tax case, authorities blocked Rs 3,703 crore ($478 million) in February under a legal provision that allows officials to take such actions to protect New Delhi's revenue interests, a Xiaomi court document showed.

Xiaomi did not respond to a request for comment.

The spokesperson for the income tax department declined to comment.

Two sources with direct knowledge said the amount blocked by tax inspectors was a fallout of the December raids conducted at Xiaomi India offices for alleged income tax evasion.

That investigation, said one of the sources, concerns allegations the Chinese company purchased smartphones from its contract manufactures at inflated costs in India, allowing it to record a smaller profit by selling them to customers and evading corporate income taxes.

Also Read | ED asks court to restore block on Xiaomi bank assets

It is not clear if the company appealed the decision.

The freeze by the income tax department was cited by Xiaomi in a May 4 court filing in southern Karnataka state, where it is challenging the other bank account seizure done by the federal crime fighting agency, the Enforcement Directorate, in the royalty case.

The Directorate says Xiaomi illegally made foreign remittances to certain entities "in the guise of" royalties even though it did not avail any service from them, an allegation the company denies. The Indian court has put on hold the Directorate's decision until May 23 on Xiaomi's appeal.

Referencing the two probes, Xiaomi states in its court document it "has cooperated in each of these investigations and provided all requisite information."

India's Income Tax Department "put under lien" Rs 3,703 crore ($478 million) of its deposits by an order dated February 18, 2022, Xiaomi stated in its filing.

Also Read | Chinese state media slams ED crackdown on Xiaomi

Chinese companies have struggled to do business in India since 2020, when a border clash occurred between the two nations. India has cited security concerns in banning more than 300 Chinese apps since then, including popular ones, such as TikTok, and tightened norms for Chinese companies investing in India.

Xiaomi recently hit the headlines with accusations that its executives faced intimidation from Indian Directorate's officials, drawing public rebuttals from the agency and words of support from the Chinese government.

Xiaomi saw its share of the Indian smartphone market quadruple from just six per cent in 2016 to 24 per cent last year, making it the market leader, according to Counterpoint Research.

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