Xiaomi India's Challenge To Seizure Of Assets Before High Court 'Premature'; Competent Authority Under FEMA Must Decide: Karnataka HC

The Enforcement Directorate by its order dated April 29, had seized Rs.5551.27 crores from Xiaomi Technology under the provisions of FEMA.

A single judge bench of Justice SG Pandit accepted the agency's contention that the company had approached the High Court prematurely. The court said,

"Accepted the contention of premature approaching the court. The Competent authority under FEMA is directed 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 making available a copy of this order."

It added,

"Interest of justice would be met if the above interim orders are continued till the orders are passed by the Competent Authority. It is clarified that the interim order passed by this court will be continued till passing of the order by the competent authority."

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 till now 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 through via bank overdraft.

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 had 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.

Additional Solicitor General M B Nargund had opposed the plea on the ground of maintainability and contended that an alternate remedy was available to the petitioners to approach with their grievance, against the order.

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, "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, the release had said.

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

Case No: WP 9182/2022

Citation no: 2022 LiveLaw (Kar) 246

Appearance: 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.

Additional Solicitor General M B Nargund for the respondent.