Expansion of ED raid/investigation to taxation matters

ED is a statutory body empowered under the Central Vigilance Commission Act, 2003 to investigate money laundering offences and violations of foreign exchange laws. The ED operates within the jurisdiction or limits of the PMLA, FEMA, Fugitive Economic Offenders Act, 2018 (FEOA), Foreign Exchange Regulation Act, 1973 (FERA) and Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (COFEPOSA).

In recent times, raids conducted by ED as part of the investigation process or collection of evidence have shown a higher possibility of investigations by other agencies like DGGI and the ITD. There have been several instances in the news wherein once a business is raided by the ED, an investigation by the ITD and/or DGGI follows next. This shows that the ED raids do not always conclude with a final report, rather investigations are initiated by other departments based on the information discovered by ED. This leads to the expansion of the scope of the initial raid. This series of investigations is chiefly a result of the sharing of data between these agencies. Various investigation agencies are legally authorized to share the relevant data to facilitate the investigation into financial crimes through an inter-agency collaborative approach, which leads to their involvement in the dispute.

According to Section 66(1)(ii) of the PMLA read with relevant notifications, ED officers are authorized to provide information available to notified agencies when necessary for the fulfilment of their functions under the relevant statute. The Central Board of Direct Taxes (CBDT), which frames policy for the ITD, vide Order dated 21.07.2020 allowed the ITD to share PAN and bank account details of any entity with investigative and intelligence agencies, including the ED and DGGI, under the integrated counter-terrorism platform NATGRID. On a similar line, the Central Board of Indirect Taxes & Customs (CBIC) vide Notification dated 07.07.2023 expanded the scope of PMLA by including the Goods and Services Tax Network (GSTN) in the specified list of agencies that are required to share information with the ED. These law enforcement agencies/regulatory bodies collaborate to ensure compliance with laws and effective prosecution of offenders. It cannot be lost sight of that all these multiple raids and investigation proceedings by different agencies can be parallel or at different times.

Overlapping of offences investigated by ED with those under the GST and IT Act

It cannot be ruled out that if one of the agencies has given a clean chit, the others cannot charge on the same subject matter if their investigation leads to appropriate evidence. This leads to a situation where one particular act is considered as an offence when viewed from both ED’s as well as DGGI / ITD’s lens. Therefore, a person can be subjected to arrest and custody by different agencies at the same time.

As regards GST, there are certain actions which involve business transactions undertaken either to avoid paying the legitimate amount of tax or, to claim wrongful input tax credit (ITC), which can be investigated by DGGI. However, when these transactions are undertaken cross-border and/or involve siphoning off the money especially if the funds are circulated through shell companies or overseas entities, such offences then fall within the purview of ED. In this situation, such transactions may attract investigation by both agencies (i.e. ED and DGGI) due to their overlapping nature.

An illustrative list of such transactions is hereunder:

Under or over-valuation of goods/services exported or imported through related parties

Fake invoicing within certain companies, whether or not located outside India, so as to inflate turnover

Claim of bogus ITC and circular trading

Fraudulently claiming GST refunds without actually exporting any goods or services

Exports without realizing any foreign exchange within prescribed timelines

Similarly, activities such as concealing income/assets abroad or engaging in fraudulent cross-border transactions, fall within the jurisdiction of both the ITD and the ED due to their implications for tax evasion, money laundering, or violation of foreign exchange regulations. During the investigation, when the ED identifies such violations, it shares data with the ITD resulting in simultaneous proceedings by these agencies thereby expanding the scope of the original scrutiny.

Below are a few instances which may attract parallel actions by ED and the ITD:

Tax evasion by concealing income/assets abroad, or wilful failure to report income earned from foreign sources/foreign investments.

Transactions aimed at evading taxes through fraudulent means such as falsifying records, inflating expenses, or manipulating financial statements.

Cross-border financial transactions including those facilitated through hawala networks or offshore accounts.

Creation and misuse of shell companies or benami transactions to conceal ownership or evade taxes.

Cases where individuals or entities misappropriate assets or funds for personal gain, including embezzlement, diversion of funds, or fraudulent conveyance of property.

In case of overlapping of offences falling within the jurisdiction of more than one investigative agency, a situation may arise when a person who is already arrested by one agency for a violation or allegation of an offence, can further be arrested by another agency for an offence falling under the jurisdiction of that other agency. Hence, it is possible in some instances that one person can be arrested by more than one investigative agency for violation of overlapping offences falling within the jurisdiction of these agencies. For instance, recently the Delhi High Court has remanded BRS leader K. Kavitha to the custody of CBI for her alleged involvement in a corruption case related to an alleged Delhi liquor policy scam. She was earlier arrested by ED for alleged money laundering in the excise policy scam and hence, was already in judicial custody when CBI arrested her.

Instances where ED raids paved the way for other agencies

There have been numerous instances wherein businesses were bombarded with different investigations after ED raids. In 2022, the ED conducted raids on various offices of the M/s DSL Dharampal Satyapal Group, owners of 'Rajnigandha' pan masala and 'Catch' spices, over allegations of money laundering and tax evasion. During the investigation, ED found alleged diversion of funds to offshore entities in tax havens (tax evasion), and bogus ITC under the GST laws. The ED's investigation led to the ITD and DGGI initiating parallel investigations into the group's financial irregularities.

In another instance, ED conducted raids on Xiaomi, Oppo, and Vivo offices in India qua alleged tax evasion, transfer pricing, and violation of FEMA regulations and subsequently, the ITD and DGGI also joined the bandwagon.

Global commodities trader ‘Trafigura’ came under ED scrutiny for a Transfer pricing violation. Trafigura is alleged to have companies in Tax havens and moving money to those companies helped it avoid taxes. Earlier, the company was investigated by the ITD.

Recently in 2023, troubled British news broadcaster BBC came under ED scrutiny for alleged foreign exchange violations. ED came into the picture after the ITD’s survey of the BBC Delhi office revealed several discrepancies and inconsistencies in transfer pricing documentation.

These trends of investigations reveal expanded jurisdiction of ED concerning certain offenses. For instance, above mentioned cases of Xiomi, Trafigura, and BBC highlight the instances of transfer pricing violations that were being investigated by ED. In a nutshell, due to the overlapping of certain offenses between PMLA, FEMA, Income Tax, and GST, the simultaneous proceedings by different agencies appear to be inevitable.

What should businesses do?

Standard Operating Procedures (SOPs) may be put in place defining the roles and responsibilities of different teams/verticals in case of sudden investigation, to ensure smooth coordination and submission of correct information to the investigating agencies. Training may be imparted to the employees in respect of maintaining confidentiality, protecting sensitive information, and safeguarding legal rights during questioning/investigations.

Regular audits and health check-ups are another way to mitigate the risk of potential inquiry. Besides mitigating litigious positions, a business review would also assist in adopting tax-efficient structures.

Disclaimer: The above is a contributor post, the views expressed are those of the contributor and do not represent the stand and views of Outlook Editorial.