Several Chinese phone makers were raided last week

New Delhi: Mobile phone makers Xiaomi and Oppo can be fined ₹ 1,000 crore for violating the law, sources in the Income Tax department said today after searches across India last week, underling that inflated expenses led to a reduction of taxable profits of over 1,400 crore.

The searches were carried out on December 21 in Delhi and 11 states - Karnataka, Tamil Nadu, Assam, West Bengal, Andhra Pradesh, Madhya Pradesh, Gujarat, Maharashtra, Bihar, and Rajasthan.

"The search action has revealed that two major companies have made remittance in the nature of royalty, to and on behalf of its group companies located abroad, which aggregates to more than ₹ 5,500 crore," the tax department said in a statement today.

"These companies had not complied with the regulatory mandate prescribed under the Income-Tax Act, 1961 for disclosure of transactions with associated enterprises. Such (a) 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 ₹ 1,000 crore," the statement added.

While the statement does not name the two firms, sources have confirmed about the searches at the premises of Xiaomi and Oppo.

The source of foreign funds is also doubtful, the central agency has said, stressing: "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 ₹ 5,000 crore, on which interest expenses have also been claimed, it underscored.

One of the firms used the services of an Indian firm but it may be liable to pay ₹ 300 crore over TDS (Tax deduction at source) violations, the government agency has said without naming the telecom company.

Another firm's Indian bosses "admitted they had no role in the management of the company and lent their names for directorship for namesake purposes", and the "the control of the affairs of the company was substantively managed from a neighbouring country."

On the day of searches, Xiaomi had said: "As a responsible company, we give paramount importance to ensuring that we are compliant with all Indian laws. As an invested partner in India, we are fully cooperating with authorities to ensure they have all the required information."

In August, Chinese government-controlled telecom vendor ZTE was searched. Searches were conducted at five premises of ZTE, including their corporate office, and the residence of the foreign director.