ED seizure of Xiaomi India bank accounts: Karnataka HC asks Chinese firm to approach FEMA authority

The ED ordered the seizure of the Indian bank accounts of the Chinese phone seller in April after investigations revealed that over Rs 5,500 crore was transferred overseas since 2016.

Xiaomi India approached the Karnataka High Court in May against the ED order and argued that the transfer of funds had gone towards payment of technology royalty, including 84 per cent of the funds going to the US firm Qualcomm Inc and Qualcomm Tech, apart from payments to Beijing Xiaomi Mobile Software Co Ltd.

The ED, however, argued that Xiaomi Technology India is only a seller of phones and not a maker of devices requiring to pay for technology patents in other countries.

The Karnataka High Court, which reserved its order in the case last month, pronounced its decision on July 5. The high court accepted the argument made on behalf of the ED that Xiaomi India approached the high court prematurely – since the matter has been referred to a competent authority as envisaged under the FEMA law before whom all arguments can be placed.

“The competent authority appointed by respondent No 1 under Sub-section [2] of Section 37 A of FEMA is directed to issue notices 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 high court has stated.

“Since the seizure order and relevant material are already placed before the competent authority, it would be appropriate for this court to direct competent authority to issue notices of hearing to the petitioner, hear the petitioner, as well as representatives of the Directorate of Enforcement, and pass appropriate orders in accordance with the law,” it said.

The court, however, extended its stay on the April 29 ED order for seizure of Xiaomi India bank accounts and allowed usage of the seized accounts “only for the purpose of meeting expenses for carrying out day-to-day activities of the company”, and not payment of royalty.

The “interests of justice would be met if the interim order is continued till orders are passed by the competent authority’”, the high court said.

“Normally, royalty is a payment made for use of technology or IPR by the manufacturer to the IPR holder. In the case on hand, it is for the petitioner to establish that apart from the manufacturer of mobile phones, the petitioner who purchases manufactured mobile phones would also be liable to pay royalty,” the high court has observed.

The ED told the HC that there was no agreement between Xiaomi India and Qualcomm for royalty payments and that royalty is being paid based “on a letter dated 17.05.2016 and an amended master software agreement dated 01.08.2016”.

Xiaomi India “could very well convince the competent authority that payment of royalty to Qualcomm and Beijing Xiaomi Mobile Software Company Limited is in the nature of running royalty and is being paid for the use of SEPs (Standard Essential Patents) and other licensed intellectual property in respect of mobiles sold in India,” the HC said.

The seizure order of the authorised officer of the ED is like a provisional decision and a “step in process of taking final decision by the competent authority”, the court observed.

The Chinese phone seller has argued that similar payments of royalties by other manufacturers and dealers of mobile phones in India to the US company for use of the same technology had not been questioned by Indian authorities and that no steps had been taken against them for FEMA violations.

Advocates for Xiaomi Technology India argued that a case had not been made out against the firm under Section 4 and Section 37 A of the FEMA law by the ED to facilitate the seizure of its assets in India.

The advocates for Xiaomi India argued that the condition under which Section 37 A of FEMA (which allows seizure of assets in India for foreign exchange violations) can be invoked is that the foreign exchange should be in a location outside India and should be available for bringing back to India.

The advocates for Xiaomi India argued that the funds transferred from India to a Chinese counterpart of the firm were used to pay royalties to Qualcomm Inc in the US for licensing of their technology that is used in the production of Xiaomi phones sold in India.

The company argued that the payments were found to be legal by the income tax department and that these payments were made from the 2015-16 period. Xiaomi India has argued that the I-T department recognised its business as a value-added activity.