The High Court of Karnataka has ordered the competent authority under FEMA to decide in 60 days on the plea by Chinese smartphone maker Xiaomi against the seizure of its Rs 5,551 crore by the Enforcement Directorate.
On April 29, 2022, the authorised officer of the ED passed an order, seizing Rs 5,551.27 crore held in Xiaomi’s bank accounts for alleged violation of the Foreign Exchange Management Act (FEMA) regulations. Xiaomi Technology India Private Limited challenged the order in the high court, calling it “arbitrary.”
The ED had initiated an investigation based on “credible” information that the company had made certain foreign remittances in the name of royalty to foreign-based entities — Qualcomm and Beijing Xiaomi Mobile Software Company Limited — in violation of the FEMA.
Based on the collected information, the authorised officer passed a seizure order under section 37A (1) of FEMA. According to the ED, the company buys completely manufactured, box-packed ready-to-sell sell/use mobile phones from four manufacturers in India and directly sells them to distributors without adding any technology or any other value to the purchased phones.
According to the ED, when there is no use of any intellectual property by the company, there is no question of paying any royalty. It also argued that Xiaomi’s petition is not maintainable since no order was passed by the competent authority before whom the ED has placed relevant materials.
The company, on the other hand, submitted that it has paid a royalty from 2016 to 2022 and the same was recognised and accepted by the income tax authorities. It also contended that Qualcomm is the owner of Standard Essential Patent Technology, without which no mobile device sold by the petitioner will have access to the mobile network interoperability. It also argued that the transfer of foreign exchange by the petitioner in the form of royalty cannot be considered as the transfer of foreign exchange out of India in contravention of Section 4 of the FEMA.
Justice S G Pandit said that whether the payments made by the company could be considered royalty or they would attract Section 4 of FEMA was a question of fact that the competent authority had to decide.
“Competent Authority appointed by the central government under Section 37A of Foreign Exchange Management Act (FEMA), 1999, is directed to issue a notice of hearing to the petitioner, hear the parties concerned and pass appropriate order either confirming or setting aside the seizure order within a period of 60 days from the date of making available a copy of this order,” the court said.
Until the competent authority takes a decision in the matter, the interim orders passed by the high court will continue to be in operation, the court has said.