The High Court of Karnataka has directed the competent authority (CA) set up under the Foreign Exchange Management Act (FEMA), 1999, to decide within 60 days on the issue of the correctness of the seizure of ₹5,551.27 crore in the bank accounts of Xiaomi Technology India Pvt. Ltd. for transferring crores of rupees to companies abroad as royalty in violation of the law.
Justice S.G. Pandit issued the direction while disposing of the petition filed by Xiaomi India, which is a wholly-owned subsidy of China-based Xiaomi group. The company had questioned April 29, 2022 provisional order passed by the Authorised Officer (AO) of the Enforcement Directorate (ED) seizing the amount in its bank accounts.
Deadlines
The court noted that the AO, as per the FEMA, would have to submit within 30 days the seizure order and relevant materials before the CA, which has to decide the correctness within 180 days from the submission.
As the AO had already submitted the seizure order before the CA on May 27, the court found it appropriate to direct the CA to decide the issue within 60 days as the petitioner-company had claimed that its business was being impacted due to the seizure of the accounts.
Meanwhile, the court continued its earlier interim orders till the CA decided on the correctness of the seizure order. In its interim order, the court had permitted Xiaomi India to operate the bank accounts only to meet the expenses for its day-to-day activities and to take overdraft from the bank to make payments to foreign entities, excluding payment of royalty.
Royalty issue
Xiaomi India had contended in its petition that it had lawfully paid royalty to Qualcomm and Beijing Xiaomi Mobile Software Co., Ltd. for using proprietary licensed intellectual property (IP), particularly the Standard Essential Patents. Questioning the correctness of the ED’s action, the petitioner-company had stated that it had disclosed to the Income Tax authorities the payment of the royalty from 2016 onwards.
However, the ED has told the court that Xiaomi India had not used any technology or IPR of Qualcomm or Beijing Xiaomi Ltd. and hence the question of paying royalty does not arise.
Section 4 of FEMA
Stating that Xiaomi India only buys from the manufacturers within India the completely manufactured mobile phones that are box-packed and ready to sell to the distributors without adding any technology or any other value to the purchased phones, the ED has alleged that amounts transferred outside India in the guise of royalty is contrary to Section 4 of the FEMA.
