Income Tax Department finds Chinese firm evading tax through fake receipts

NEW DELHI: The Income Tax department on Thursday said that recent raids conducted against a Chinese firm that deals in telecom products have revealed that the companies were involved in tax evasion through fake receipts.

The IT department has detected suppression of income of Rs 400 crore. The raids were conducted in the second week of February across India and in the National Capital Region.

The search action has revealed that the group 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.

During the search, it was found that the assessee group has 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 the brand and technical know-how related to intangibles.

"During the search, the group 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," said an IT official.

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 search action has further revealed 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 and advances etc, which have little or no financial rationale. During the investigation, the group failed to provide any substantial and appropriate justification for such claims.

Further investigations are underway. (IANS)

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