K'taka HC Rejects Xiaomi Petition Against INR 5,551 Cr Seizure

SUMMARY

Last April, the Competent Authority appointed under the FEMA seized INR 5,551.27 Cr from Xiaomi for violating FEMA guidelines

The company has maintained that its royalty payments, which the ED alleges were done to evade taxes, were all legitimate

FEMA had confirmed the seizure, India’s largest-ever, in September 2022, and the matter has been sub-judice in the Karnataka High Court

The Karnataka High Court has denied Xiaomi’s attempt to challenge the seizure of INR 5,551 Cr ($676 Mn) by Indian authorities for violating FEMA guidelines.

A Xiaomi spokesperson informed Reuters, “We are studying the matter and waiting for the written order”, adding the Chinese smartphone maker’s operations in India are compliant with local laws and regulations.”

The development comes as last April, the Competent Authority appointed under the Foreign Exchange Management Act, 1999 (FEMA) seized INR 5,551.27 Cr from Xiaomi for violating FEMA guidelines.

However, since then, the company has maintained that its royalty payments – the bone of contention here – were legitimate. The smartphone maker said last October that all royalty payments made by it were related to its sales, adding that third-party provider Qualcomm also confirmed this.

Previously, Xiaomi had stated that it would take all necessary measures to safeguard its interests and reputation in India.

The Enforcement Directorate (ED) ordered the seizure in April last year, alleging that Xiaomi India had made remittances to foreign companies under the pretext of royalties for services it never received from them.

Shortly after the seizure, the company knocked on the doors of the Karnataka High Court, which stayed ED’s seizure order on Xiaomi’s petition by early May 2022, allowing the Chinese smartphone market to continue to operate its bank accounts for day-to-day activities

However, by July-end, ED petitioned the High Court to allow the competent authority under FEMA to pass an appropriate order, arguing successfully that Xiaomi had approached the court prematurely.

This led to FEMA confirming India’s largest-ever seizure in September 2022, after which Xiaomi again approached the Karnataka High Court. However, in October, the court did not give interim relief to Xiaomi, and now it has rejected the Chinese smartphone maker’s plea altogether.

Xiaomi is not the only Chinese smartphone manufacturer that is under the lens of Indian financial authorities. Last July, the ED alleged that Vivo remitted INR 62,476 Cr to foreign parties, mostly Chinese companies, in the form of royalties to avoid paying taxes in India, a claim the company denied.

OPPO is another Chinese smartphone maker under the government scanner for alleged tax evasion. The ED alleged last year that it had evaded tax to the tune of INR 4,389 Cr in India.

Chinese companies in India have had a hard time ever since Indian Army clashed with the People’s Liberation Army of China at the Galwan border in 2020. Since then, the government has banned around 300 Chinese apps and barred Chinese telecom makers from selling products to Indian telcos to ensure national security.