Three Chinese firms have allegedly avoided income tax on ₹2,200 crore of profits earned from solar business of ₹45,000 crore over the last 10 financial years (FYs), an Income Tax department investigation has revealed.

The main contention of the IT department is that the three Chinese firms had Indian subsidiaries that constituted “permanent establishment (PE)“ for IT purposes. When a foreign entity is declared to have a PE in India, under the IT Act the entity has a taxable presence in India. By virtue of this PE status, the tax department contends that the ₹2,200-crore profits attributed to PEs in India is taxable here, as they are deemed to have arisen or accrued in the country.

Thus, income earned by the foreign entity from business operations connected to the PE, is subjected to Indian corporate tax rates and consequent compliances.

Not declaring permanent establishment status

“The companies are engaged in tax evasion at a large scale in a systematic manner by suppressing sales of services at their end and helping the holding companies evade taxes in India by not declaring their PE (Permanent Establishment) in India,” two IRS officers working in the investigation wing of IT in Delhi, wrote in the CBDT’s e-journal, Taxalogue.

The alleged tax evasion is serious since China contributes about 80 per cent of the import of solar panels and modules in India. More than $7.5 billion worth of solar modules have been imported in the last five FYs, according to the tax authorities.

The Directorate of Income Tax (Investigation), Delhi, carried out searches and seized documents from the premises of three Chinese firms sometime back. The IT sleuths realised that the two of them had not paid tax on profits earned out of sale of solar products in India, while the third one had deposited a mere ₹45.7 crore

“The search and seizure action found that total exports of approximately ₹45,000 crore (around $6 billion) have been made by these three groups to India in the last 10 financial years. Profit attributable to PE in India on total sales of ₹45,000 crore has remained outside the taxation net in India,” the officers wrote in Taxalogue.

The three Chinese firms are facing tax assessment proceedings at the Central Circle of the Income Tax Department in Delhi after the investigation wing of the department completed its probe.

It was found that all the subsidiary companies were set up to facilitate sale of solar panels/ inverters for their respective Chinese companies.

There is no revenue receipt in subsidiary companies from any other activity in two groups and a negligible consultancy receipt was shown in one group over the last two years only. Interestingly, the Indian subsidiary companies showed losses for most of the financial years, the IT probe flagged.

Though the solar products were manufactured in China, they were traded through trading entities of the three Groups in Hong Kong or Singapore.

The sales and distribution of solar products of these groups in India is undertaken by a sales and marketing team employed by the Indian subsidiaries. But, the billing activity was handled from foreign countries and payment was made directly abroad by the Indian customers, the IT officials noted following examination of documents of these three companies.

As per the Income-tax Act, 1961, if any income of a foreign company is received or deemed to be received in India or is accrued/arisen or deemed to have accrued/arisen in India, the source of such income is said to be in India and by virtue of principal of “source base” of taxation, India has right to tax such income.

If the foreign company has an extended period of presence in India for carrying out their business activity here, the income derived by such foreign company to the extent it is attributable to their presence in India will become taxable in India.

Related Topics