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NEW DELHI, May 12 - Indian tax officials froze $478 million worth of deposits lying in local bank accounts of China's Xiaomi Corp (1810.HK) in February as part of an investigation into alleged tax evasion, according to two sources and a court filing reviewed by Reuters.

The fund freeze by tax authorities, being reported for the first time by Reuters, comes on top of another legal tussle Chinese smartphone giant Xiaomi faces where it has challenged - successfully so far - a block on $725 million of its funds by another Indian enforcement agency for alleged illegal foreign remittances. read more

In the income tax case, authorities blocked 37 billion rupees ($478 million) in February under a legal provision that allows officials to take such actions to protect New Delhi's revenue interests, a Xiaomi court document showed.

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Xiaomi did not respond to a request for comment.

The spokesperson for the income tax department declined to comment.

Two sources with direct knowledge said the amount blocked by tax inspectors was a fallout of the December raids conducted at Xiaomi India offices for alleged income tax evasion.

That investigation, said one of the sources, concerns allegations the Chinese company purchased smartphones from its contract manufactures at inflated costs in India, allowing it to record a smaller profit by selling them to customers and evading corporate income taxes.

It is not clear if the company appealed the decision.

The freeze by the income tax department was cited by Xiaomi in a May 4 court filing in southern Karnataka state, where it is challenging the other bank account seizure done by the federal crime fighting agency, the Enforcement Directorate, in the royalty case.

The Directorate says Xiaomi illegally made foreign remittances to certain entities "in the guise...

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