Xiaomi vs Govt of India: Check-out what is happening?

The Enforcement Directorate (ED), on April 30, announced that it has seized more than Rs 5,500 crore worth of Xiaomi India’s assets stating that the smartphone maker made illegal remittances to foreign entities.

Xiaomi India is in the news of late. The company creates a lot of buzz with its smartphones that not just offer best-in-class hardware but often come with great pricing. While that might not be news, the company’s India division violating foreign exchange regulations did attract a lot of attention.

The Enforcement Directorate (ED), on April 30, announced that it has seized more than Rs 5,500 crore worth of Xiaomi India’s assets stating that the smartphone maker made illegal remittances to foreign entities and showed them as royalty payments. ED’s investigation reveals that Xiaomi India started remitting foreign currency equivalent to Rs 5,551.27 crore since 2015 – a year after it began its India operations.

According to the federal financial-crime fighting agency, Xiaomi India remitted the huge sum under the guise of royalty from three companies, one of which was a Xiaomi group entity. The statement further read that Xiaomi India remitted the amount following instructions from its parent group in China. “The amount remitted to two other US-based unrelated entities was also for the ultimate benefit of the Xiaomi group entities,” ED’s statement read.

Furthermore, the ED stated that Xiaomi India did not avail any services from the three foreign entities to whom Rs 5,550 crore was transferred. In fact, the company has been procuring its products from various manufacturers within the country. Xiaomi India was also found to have provided misleading information to banks while remitting the money aboard, the ED said.

What did Xiaomi India say?

Xiaomi India, in its defence statement, said that the company is committed to India and that it adheres to the local laws and regulations. “These royalty payments that Xiaomi India made were for the in-licensed technologies and IPs used in our Indian version products. It is a legitimate commercial arrangement for Xiaomi India to make such royalty payments. However, we are committed to working closely with government authorities to clarify any misunderstandings.”

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Not for a first time for Xiaomi India:

This is not the first time that Xiaomi India has found itself surrounded by various Indian federal agencies. On the very last day of 2021, the Income Tax Department released a statement to the press stating that two companies were found violating the law pertaining to non-disclosure of related-party transactions. The IT department did not specifically mention the names of these two companies. However, reports revealed that these two companies were Xiaomi and Oppo.

The statement further revealed that the department is probing the two companies for alleged bogus borrowings of over Rs.5,000 crore. The IT department also found one of the two companies’ local affairs was being managed from a neighbouring country. “The search action has revealed that two major companies have made remittance in the nature of royalty, to and on behalf of its group companies located abroad, which aggregates to more than Rs.5500 crore,” the IT department’s press release read.

A week after the raids, the Directorate of Revenue Intelligence (DRI) issued three show-cause notices to Xiaomi India for demand and recovery of duty amounting to Rs 653 crores. The DRI, in its statement, said that Xiaomi India was found evading customs duty by way of undervaluation.

The DRI then initiated an investigation against Xiaomi India and its contract manufacturers. Certain documents found in the office premises of Xiaomi India revealed that the company was remitting royalty and licence fee to Qualcomm USA and to Beijing Xiaomi Mobile Software Co.

According to one of the statements released to the press, one of Xiaomi India’s directors confirmed the said payments.

Further, the investigations revealed that the royalty and license fee paid by Xiaomi India to Qualcomm USA and to Beijing Xiaomi Mobile Software Co in China were not shown in the transaction value of goods imported by Xiaomi India or its contract manufacturers – Foxconn and Dixon. The DRI found that Xiaomi India and its contract manufacturers included the royalty amount paid in the accessible value of goods imported by them, which is in violation of Section 14 of the Customs Act, 1962. Thus, by not adding royalty and licence fee to the transaction value, Xiaomi India was evading customs duty.

Xiaomi India, following the incident, released a statement which read, “At Xiaomi India, we give utmost importance to ensuring we comply with all Indian laws. We are currently reviewing the notice in detail. As a responsible company, we will support the authorities with all necessary documentation.”

Former Managing Director Manu Jain summoned by ED:

Following the IT department and DRI’s investigations, the ED summoned Xiaomi India’s former India Managing Director Manu Kumar Jain, Reuters reported. When asked about the probe, a Xiaomi spokesperson said the company abides by all Indian laws and was “fully compliant with all the regulations.”

In addition to this, the statement said that Xiaomi India is cooperating with authorities in their ongoing investigation to ensure they have all the requisite information. The ED did not make the details of the ongoing investigation public. However, the Reuters report, citing sources, revealed that ED had asked Jain to provide various company documents, which included details of foreign funding, shareholding and funding patterns, financial statements and information of key executives running the business.

Xiaomi India is currently the number one smartphone company in India with a market share of about 25 per cent. Analysts believe that the ongoing scrutiny could tamper with the brand’s image but is unlikely to affect the company’s sales numbers in India.

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