The Income Tax Department has in a search and seizure operations found that two major foreign-owned telecom companies manufacturing mobile phone hand-sets  and mobile communication equipment have remitted a whopping Rs 5,500 crore to their parent companies abroad as royalty from Indian operations in violation of the income tax law,” according to a finance ministry statement.

“ The claim of such expenses does not seem to be appropriate in light of the facts and evidence gathered during the search action,” the statement explained.

“It is gathered that both these companies had not complied with the regulatory mandate prescribed under the Income-tax Act, 1961 for disclosure of transactions with associated enterprises. Such lapse makes them liable for penal action under the Income-tax Act, 1961, the quantum of which could be in the range of more than Rs.1000 crore,” the statement said.

The search operation was carried out on December 21 on various premises in Delhi & NCR, Karnataka, Tamil Nadu, Assam, West Bengal, Andhra Pradesh, Madhya Pradesh, Gujarat, Maharashtra, Bihar and Rajasthan.

However, the statement does not mention the names of the two companies as it is not permitted under the existing income tax rules.

The search has brought to the fore another modus operandi whereby foreign funds have been introduced in the books of the Indian company but it transpires that the source from which such funds have been received are of doubtful nature, purportedly with no credit worthiness of the lender.  The quantum of such borrowings is about Rs.5000 crore, on which interest expenses have also been claimed.

Evidence with regard to the inflation of expenses, payments on behalf of the associated enterprises, etc. has also been noticed which led to the reduction of taxable profits of the Indian mobile handset manufacturing company. The amount involved could be in excess of Rs 1,400 crore.

The search operation also found that one of the companies utilized the services of another entity located in India but did not comply with the provisions of tax deduction at source introduced.  The quantum of liability of TDS on this account could be around Rs 300 crore.

In the case of another company covered in the search action, it has been detected that the control of the affairs of the company was substantively managed from a neighbouring country. The Indian directors of the said company admitted that they had no role in the management of the company and lent their names for directorship for namesake purposes. Evidence has also  been gathered on an attempt to transfer the entire reserves of the company to the tune of Rs 42 crore out of India, without payment of due taxes.

Survey action in the case of certain fintech and software services companies have revealed that a number of such companies have been created for the purposes of inflating expenses and siphoning out of funds.  For this purpose, such companies have made payments for unrelated business purposes as also utilized the bills issued by a Tamil Nadu based non-existent business concern.  The quantum of such out-flow is found to be around Rs 50 crore, the statement added.

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