Karnataka HC Asks Xiaomi To Go To ‘Competent Authority’ Over ED’s Seizure Of Assets

Following the Xiaomi India fiasco, now the Karnataka HC has asked the smartphone company – the fully owned subsidiary of China-based Xiaomi Group – to approach a competent authority to reverse the order.

Justice SG Pandit made it clear that the interim order will continue till the matter is decided by the ‘competent authority’. 

It is to be noted here that, in late April 2022, the Enforcement Directorate (ED) has seized funds worth INR 5,551.27 Cr from Xiaomi India for violating the terms of the foreign exchange act. Consequently, Xiaomi had asked the Karnataka HC to challenge the provisional attachment order. 

According to the Foreign Exchange Management Act (FEMA), 1999, the order of seizure along with relevant material shall be placed before a competent authority, appointed by the central government; an officer not below the rank of joint secretary to the government.

Thus, the competent authority has been directed to pass an order either confirming or setting aside Xiamoi’s seizure order within 180 days. 

Xiaomi’s Troubles With ED

Xiaomi India has claimed that the Indian subsidiary of the Chinese company has paid INR 4,673.95 Cr and INR 877.31 Cr to Qualcomm and Beijing Xiaomi Mobile Software Company, respectively – as royalty for use of patents, technology and other intellectual property, between 2016 and 2022.

ED, on the other hand, has contended that Xiaomi purchases ready-to-sell mobiles from four manufacturers based in India. It then sells them directly to distributors without adding any technology. 

Thus, it has not received any service, software, intellectual property rights or technology from its Chinese parents. “When there is no use of any intellectual property by the petitioner, there arises no occasion for the petitioner to pay the royalty,” ED argued.

Therefore, ED seized the amount lying in the bank accounts of the Chinese smartphone giant in connection with alleged ‘illegal outward remittances made by the company’.

According to the order, seen by Inc42, the court directed the competent authority on July 5, 2022, to decide whether the payments made by the petitioner to Qualcomm and its parent company could be considered royalty or would attract a violation of section 4 of FEMA (where Indian resident will not be allowed to acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India).

Besides ED, the Income Tax department has also found Xiaomi evading tax duties worth INR 653 Cr.

A Crackdown On China-Based Smartphone Makers In India?

Besides Xiaomi, many tech giants with parent companies based out of China have been under the government radar, including Oppo and Vivo.

In January, smartphone makers Oppo and Xiaomi were said to be facing fines of up to INR 1,000 Cr after violating tax law. They had claimed expenses amounting to INR 5,500 Cr that the Income Tax department deemed inappropriate – i.e. payment of royalties to their Chinese parents.

Only today, Vivo was refused any interim relief by the Delhi HC, after ED alleged a money laundering/tax invasion on assets worth INR 62,476 Cr against the company. 

The ED said that it has so far seized 119 bank accounts of various entities related to Vivo, with a gross balance to the tune of INR 465 Cr. The seized amount includes fixed deposits of up to INR 66 Cr, 2 kg gold bars, and cash of up to INR 73 Lakh. 

During the investigation, the ED also found that former Vivo director Bin Lou formed 18 companies in India between 2014-18. Besides, another Chinese national Zhixin Wei incorporated four companies in the country. It was also reported that Vivo’s Chinese directors fled India after the ED intensified its probe.

Previously, Huawei and OnePlus have also been probed by the ED. 

China has thus, condemned the probe, saying that frequent investigations by Indian agencies were deteriorating the goodwill of the companies, disrupting their normal business activities.