Karnataka High Court Extends Stay On ED Seizure Order, Permits Xiaomi India To Avail Overdraft Facility For Payments Except Royalty

A single-judge bench of Justice S Sunil Dutt Yadav clarified that in the meantime, Xiaomi India was allowed to make payments to foreign entities for importing items essential to its manufacturing and selling of smartphones, excluding royalties through via bank overdraft.

"The interim order earlier granted is extended till next date. Additional Solicitor General M B Nargund says an application for vacating of stay order will be filed during the course of the day. Matter requires hearing so far as the further interim order sought by the petitioner. Due to paucity of time matter cannot be heard. Adjourned to May 23. It is clarified that petitioner is at liberty to take an overdraft and make payments from such an overdraft excluding royalty, it is matter between him and the bank. List the matter on 23^rd May."

Senior Advocate S Ganesh had sought a clarification from the court of the earlier order as the banks had requested the company to get a clarification from the court on remitting foreign payments apart from royalty.

It was submitted, "I require to make patents on a daily basis. The Impugned order of the authority is confined to royalty." ASG Nargund submitted that "Let the petitioner keep the seized amount in the bank and rest of the things let them operate." He also informed the court that statements of objections have been filed to the petition.

On May 5, the court had issued an emergent notice to the respondent on the petition filed by the company. It had then said, "Issue emergent notice to respondents to respondents 1 to 5. The operation of the order dated 29/04/2022 passed by respondent 3, is stayed. However, it was stayed subject to the condition that the petitioner operates the bank account which is seized under the impugned order for the purpose of carrying out the day to day activities of the company."

Senior Advocate S Ganesh and Sajan Poovayya appearing for the company had submitted that the payment of Technology Royalty, paid to three companies situated outside India, is not in contravention of section 4 of FEMA Act and said such payments have been held lawful by Income Tax department and allowed the same as deduction and also held that it is value-added activity, which is evident from the order passed by the Dispute Resolution Panel of the Central Government, consisting of three Senior Commissioners.

Further, he submitted that the condition precedent for invoking section 37A of FEMA is that the amount shall be lying in an account in a foreign location and should be available to bringing it back to India. In the absence of any allegation that Foreign exchange held by the petitioner is lying in an account located in a foreign country, the impugned order of seizure under section 37A of the Act is not sustainable in law.

It was also contended that the Technology Royalty payments have been made during the period from 2016 till date and through authorised dealers and in the absence of material of such amount is held in contravention of section 4 of the Act, outside India, the order of seizure is not sustainable in law. Further he submitted that similar payment made by other manufacturers/dealers of mobile phones in India to the very same company in USA, for the same technology has not been questioned and no steps are taken against the said companies for holding Foreign Exchange in violation of Section 4 of the act.

He also said that the writ petition is maintainable, though alternative remedy of appeal is provided since FEMA Appellate Tribunal has not been constituted. None appeared for the respondents. Following which the court posted the matter for further hearing on May 12.

A press release issued by ED 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, it said that "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 were 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. Under the cover of various unrelated documentary façades created amongst the group entities, the company remitted this amount in the guise of Royalty abroad which constitutes a violation of Section 4 of the FEMA. The Company also provided misleading information to the banks while remitting the money abroad.

Senior counsel Mr. S. Ganesh and Mr. Sajan Poovayya 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 represented Xiaomi.

Case Title: Xiaomi Technology India Private Limited v. Union of India

Case No: WP 9182/2022