CBDT claims Huawei manipulated account books to reduce taxable income

The income tax department has found alleged manipulation of account books for reducing taxable income in India by Chinese telecom company Huawei whom it raided recently, sources said on Thursday.

The searches were conducted on February 15 at the main business and residential premises of "key office bearers" of a multi-national group, engaged in distribution of telecom products and providing captive software development services, the CBDT said in a statement.

Sources identified the company as Huawei.

"The ultimate shareholding of the group lies with a foreign entity of a neighbouring country," the statement issued by the policy-making body for the tax department said.

The CBDT alleged that the group "manipulated its books of account to reduce its taxable income in India through creation of various provisions for expenses, such as provisions for obsolescence, provisions for warranty, doubtful debts/loans and 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," it alleged.

The company, during the searches, had said it was "firmly compliant" with Indian laws.

"Huawei is confident our operations in India are firmly compliant to all laws and regulations. We will approach related Government departments for more information and fully cooperate as per the rules and regulations and follow the right procedure," the company had said in a statement.

The CBDT statement made multiple charges against the company including that it "made inflated payments against receipt of technical services from its related parties outside India."

"The assessee company could not justify the genuineness of obtaining of 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 Rs129 crore over a period of five years," it said.

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, the CBDT said.

"Such expenses have been incurred for the use of brand and technical know-how related intangibles. During the search, 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," it said.

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 statement said.

Evidences gathered and statements recorded during the search also reveal 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 evidences 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," it claimed.

The Indian government has kept Huawei out of trials for 5G services.

However, telecom operators have been allowed to source telecom gear from Huawei and ZTE under their old agreements for maintaining their networks but they will need approval of the government before getting into any new business agreement as per National Security Directive on Telecommunication Sector.