Two foreign-controlled companies can face penalty of over Rs 1,000 cr for violating law, says CBDT

Two foreign-controlled mobile companies can face a penalty of over Rs 1,000 crore for not complying with the regulatory mandate prescribed under the Income-tax Act, 1961 for disclosure of transactions with associated enterprises, said the Central Board of Direct Taxes (CBDT) on Friday.

In a statement issued by the CBDT, it stated that the Income Tax Department carried out search operations across the country on December 21 in the case related to foreign-controlled mobile communication and hand-set manufacturing companies and their associated persons.

The search operations took place at various premises in the states of Karnataka, Tamil Nadu, Assam, West Bengal, Andhra Pradesh, Madhya Pradesh, Gujarat, Maharashtra, Bihar, Rajasthan and Delhi NCR.

Central Board of Direct Taxes (CBDT) said that the operation revealed that two major companies have made remittances in the nature of royalty, to and on behalf of its group companies located abroad, which aggregates to more than Rs 5,500 crore.

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

The search operation has also brought out the modus operandi of purchase of the components for manufacturing mobile handsets.

"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 1,000 crore," said the CBDT.

The search has brought to 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 creditworthiness of the lender. The quantum of such borrowings is about Rs 5,000 crore, on which interest expenses have also been claimed, said the CBDT.

The central agency further said 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 the source introduced with effect from April 1, 2020. 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 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, said CBDT.

Survey action in the case of certain fintech and software services companies has 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 and 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, said CBDT.

Further investigations are in progress.

( With inputs from ANI )

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