Karnataka High Court Rejects Xiaomi's Petition Challenging Seizure Of ₹5551.27 Crore By Enforcement Directorate, Upholds S.37A FEMA

The Karnataka High Court on Friday rejected the petition filed by Xiaomi India challenging an order passed by the Competent Authority appointed under the Foreign Exchange Management Act,1999 (FEMA), confirming the order issued by the Enforcement Directorate (ED) seizing Rs.5,551.27 crores of the company.

A single judge bench of Justice M Nagaprasanna though upheld the maintainability of the petition, it dismissed the same on merits.

The company had approached the court challenging the constitutional validity of section 37A of FEMA Act contending it to be violative of Article 14, 20 read with Article 300A and 301 of the Constitution of India. The provision empowers Centre's authorized officer to seize an entity's assets in India on suspicion of violation of FEMA.

Xiaomi had contended that the mandate of section 37A is vague as it uses the phrase "reason to believe" and "suspected" in the same breath, whilst bestowing unfettered powers to the Authorized Officer to seize property at his whims and wishes.

Additional Solicitor General M B Nargund for the Centre had argued that Xiaomi is a foreign entity and cannot maintain the writ petition. The High Court observed,

"Challenge to the Constitutional validity of Section 37A of the Act by the petitioner is held to be maintainable, on the fulcrum of the allegation that it is violative of Article 14 of the Constitution of India. As Article 14 is person centric whereas Fundamental Rights under Article 19 are citizen centric.”

The Court however upheld the constitutional validity of Section 37A and said it does not suffer from any manifest arbitrariness.

The High Court had reserved its verdict in the matter on November 17, 2022. It has granted liberty to the company to avail statutory remedy Section 37A(5). “The writ petition is rejected, but the rejection of the petition will not come in the way of the petitioner availing remedy of appeal under section 37A (5) of the Act, in accordance with law,” it said.

ASG Nargund had defended Centre's action saying it was government's endeavour to bring back the money "parked" outside of India. "The amount parked outside is around Rs 5,551 crores, so we have attached it. Even if today the petitioners bring it back, the attachment order goes and so will the prosecution," the ASG had argued.

It was submitted that the department has followed the procedure and action taken is scrutinised by officers and is done by a Competent officer not belonging to ED, but an officer not below the rank of Joint Secretary from another department.

Relying on section 37A of the Act, the agency argued that, "Section 37A has enough safeguards and also provides appeal opportunity. Therefore, how can it be called arbitrary. So many checks and balances are available thus it cannot be said to be arbitrary."

On the grounds of maintainability, ASG had asked the Court to consider whether a foreign company can challenge the constitutional validity of the statue. "It doesn't even have voting right. A challenge can only be limited to the proceedings initiated and no challenge to the constitutional validity of the section is maintainable," it was said.

Xiaomi argued that Section 37A does not specify the timeline till when the order will be in operation. It was also submitted once the order is passed by the authorised officer and confirmed by the competent authority, the same can continue to be in operation till final adjudication of the proceedings.

Finally it was submitted that the petitioner company is being singled out and the money which is claimed to be transferred is nothing but payments made towards royalty to Qualcomm through proper channels for carrying out the day-to-day business of the company.

Background:

On May 5, the court had issued an emergent notice to the respondent on the petition filed by the company. It had then stayed the ED order, subject to the company operating the seized accounts only for the purpose of carrying out day to day activities. The order of stay had been continued during the pendency of the petition and the company was even allowed to make payments to foreign entities for importing items essential to its manufacturing and selling of smartphones, excluding royalties via bank overdraft. The interim was to continue till competent authority passes its order.

In July, the high court had accepted the agency's contention that the company had approached the High Court prematurely challenging the order of the Enforcement Directorate. It had then directed the Competent authority under FEMA to issue notice of hearing to the petitioner, hear the parties concerned and pass appropriate order, confirming or setting aside the decision of ED within a period of 60 days.

"The interim order passed by this court on 05.05.2022 and clarified on 12.05.2022 would enure to the benefit of the petitioner, till the competent authority passes order Section 37A(3) of FEMA," the court had said in its order dated July 5.

The competent authority by its order dated September 19 confirmed the seizure order passed by ED. Following which the company challenged it in court.

Earlier a press release issued by ED had stated that, "Xiaomi India is a wholly owned subsidiary of China based Xiaomi group. This amount of Rs. 5551.27 Crore lying in the bank accounts of the company has been seized by the ED. ED had initiated investigation in connection with the illegal remittances made by the company in the month of February this year.

Further the ED said, "The Company started its operations in India in the year 2014 and started remitting the money from the year 2015. The Company has remitted foreign currency equivalent to INR 5551.27 Crore to three foreign based entities which include one Xiaomi group entity in the guise of Royalty. Such huge amounts in the name of Royalties were remitted on the instructions of their Chinese parent group entities. The amount remitted to other two US-based unrelated entities was also for the ultimate benefit of the Xiaomi group entities."

Xiaomi India is a trader and distributor of mobile phones in India under the brand name MI. Xiaomi India procures completely manufactured mobile sets and other products from the manufacturers in India. Xiaomi India has not availed any service from the three foreign-based entities to whom such amounts have been transferred, according to the ED.

Case Title: XIAOMI TECHNOLOGY INDIA PRIVATE LIMITED v. UNION OF INDIA

Case No: WP 19973/2022

Citation: 2023 LiveLaw (Kar) 158

Date of Order: 21-04-2023.

Appearance: Udaya Holla, learned senior counsel for the petitioner along with Aditya Vikram Bhat, Deepak Chopra, Harpreet Singh, Shravanth Arya Tandra, Radhika V. and Mithel Reddy for petitioner.

ASG M B Nargund a/w Advocate Madhukar Deshpande for respondent.