The Karnataka High Court on Monday extended the earlier interim order of the Enforcement Directorate, which had seized Rs.5551.27 crores from M/s Xiaomi Technology India Pvt Ltd under the provisions of the Foreign Exchange Management Act, 1999, until June 1. (FEMA).
Due to a lack of time, a single-judge bench led by Honourable Justice S G Pandit scheduled the case of Xiaomi Technology India Private Limited v. Union of India (WP 9182/2022) for hearing on June 1. In the meantime, the court clarified that Xiaomi India was allowed to make payments to foreign entities for importing items essential to its manufacturing and selling of smartphones via bank overdraft, excluding royalties.
Facts of the case:
Under the provisions of the Foreign Exchange Management Act, 1999, the Enforcement Directorate issued an order seizing Rs. 5551.27 crore from Xioami Technology India. The petitioner filed a writ petition to overturn the order of the Enforcement Directorate.
The banks had requested that the company get a clarification from the court on remitting foreign payments other than royalty, so Senior Advocate S Ganesh had sought clarification from the court.
The court had issued an emergent notice to the respondent on the company’s petition on May 5. It then stated, “Respondents 1 to 5 should receive an urgent notice. The operation of respondent 3’s order dated April 29, 2022 is stayed. It was, however, stayed on the condition that the petitioner use the bank account seized under the impugned order for the company’s day-to-day operations.”
Senior Advocate S Ganesh and Sajan Poovayya, representing the company, had then argued that the payment of Technology Royalty to three companies based 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, which allowed the payments as a deduction, and that it is a value-added activity, as evidenced by the order of the Central Government’s Dispute Resolution Panel.
He also claimed that one of the prerequisites for invoking section 37A of the FEMA is that the funds be held in a foreign account and be readily available for transfer back to India. The impugned order of seizure under section 37A of the Act is not legally enforceable because there is no allegation that the petitioner’s foreign exchange is held in a foreign account.
It was also argued that Technology Royalty payments were made through authorised dealers from 2016 to the present, and that in the absence of material of such amount held in contravention of section 4 of the Act outside India, the seizure order is not legal. He also claimed that similar payments made by other Indian mobile phone manufacturers/dealers to the same company in the United States for the same technology have not been questioned, and that no action has been taken against the 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 available due to the lack of a FEMA Appellate Tribunal. There were none for the respondents. The case was then adjourned until May 12 for further proceedings.
According to a press release issued by ED, “Xiaomi India is a wholly owned subsidiary of the Xiaomi Group, based in China. The ED has seized a total of Rs. 5551.27 crore from the company’s bank accounts. ED had initiated investigation in connection with the illegal remittances made by the company in the month of February this year”.
It also stated that, “The company began operations in India in 2014 and began remitting funds in 2015. The company has sent foreign currency worth INR 5551.27 crore to three foreign-based entities, one of which is a Xiaomi group company operating under the name Royalty. On the orders of their Chinese parent group entities, such large sums in the name of royalties were remitted. The money sent to two unrelated entities in the United States was also intended for the Xiaomi group’s benefit.”
Xiaomi India is a mobile phone trader and distributor in India under the MI brand. Xiaomi India buys fully assembled mobile phones and other products from Indian manufacturers. Xiaomi India has not received any services from the three foreign-based entities to whom these funds were sent. 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 is a violation of Section 4 of the FEMA. While remitting money abroad, the company also provided banks with false information.