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Stay on ED Order Seizing Xioami India Assets: In Karnataka High Court

The Karnataka High Court on Thursday stayed the Enforcement Directorate’s order dated April 29, by which it seized Rs.5551.27 Crore from M/s Xiaomi Technology India Private Limited under the provisions of the Foreign Exchange Management Act,1999.

In the case of Xioami Technology India Private Ltd. vs Union of India (Case No.: WP 9182 of 2022), a single judge bench led by Honorable Justice Hemant Chandangoudar issued an emergent notice to the respondent, saying, “Issue emergent notice to respondents to respondent 1 to 5.” The operation of respondent 3’s order dated 29/04/2022 is stayed. It is, however, stayed on the condition that the petitioner use the bank accounts seized under the impugned order to carry out the day-to-day operations of the company.

The Enforcement Directorate issued an order seizing Rs. 5551.27 crore from Xioami Technology India under the provisions of the Foreign Exchange Management Act, 1999. The petitioner filed a writ petition challenging the Enforcement Directorate’s order.

Senior Advocate S Ganesh and Sajan Poovayya, appearing for the company, submitted that the payment of Technology Royalty to three companies located outside India is not in violation of Section 4 of the FEMA Act, and that such payments have been held lawful by the Income Tax Department and allowed as deduction, and that it is value added activity, as evidenced by the order passed by the Central Government’s Dispute Resolution Panel, consisting of 3 senior commissioners.
Furthermore, he claimed that the condition precedent for invoking Section 37A of the FEMA is that the money be in a foreign account and be available for return to India. In the absence of any allegation that the petitioner’s foreign exchange is in an account in a foreign country, the impugned seizure order under Section 37A of the Act is not legally enforceable.

It was also argued that Technology Royalty payments had been made from 2016 to the present through authorized dealers, and that in the absence of material of such amount being held in contravention of Section 4 of the Act, outside India, the order of seizure is not legal. Furthermore, he stated that similar payments made by other mobile phone manufacturers/dealers in India to the same company in the United States for the same technology have not been questioned, and no action has been taken against the said companies for holding Foreign Exchange in violation of Section 4 of the act.

He also stated that the writ petition is maintainable, though an alternative remedy of appeal is provided in the absence of a FEMA Appellate Tribunal. There were none for the respondents. Following that, the court scheduled a new hearing for May 12.

According to an ED press release, “Xiaomi India is a wholly owned subsidiary of the China-based Xiaomi group.” The ED has seized Rs. 5551.27 crore that was in the company’s bank accounts. The ED had launched an investigation into the company’s illegal remittances made in February of this year.

It went on to say, “The Company began operations in India in 2014 and began remitting funds in 2015.” The Company has transferred foreign currency worth INR 5551.27 crore to three foreign-based entities, one of which is a Xiaomi group entity known as Royalty. Such massive sums in the name of royalties were remitted at the request of their Chinese parent group entities. The funds transferred to two unrelated entities in the United States were also for the benefit of the Xiaomi group entities.

Xiaomi India is an Indian trader and distributor of mobile phones under the MI brand. Xiaomi India purchases fully assembled mobile phones and other products from Indian manufacturers. The three foreign-based entities to whom such funds have been transferred have not provided any services to Xiaomi India. The company remitted this amount in the guise of Royalty abroad under the cover of various unrelated documentary façades created among the group entities, which constitutes a violation of Section 4 of the FEMA. The Company also provided false information to banks when remitting money abroad.

Mr. S. Ganesh and Mr. Sajan Poovayya, senior counsel, and Advocates Mr. Aditya Vikram Bhat, Mr. Deepak Chopra, Mr. Harpreet Ajmani, Mr. Shravanth Arya Tandra, Mr. Amogh Anand, Mr. Pratibhanu, and Mr. Mithel Reddy R stood in for Xiaomi.

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