Madras HC dismisses Xiaomi's petition against ED proceedings in FEMA violation case

Chennai, July 3 (IANS) The Madras High Court has dismissed the petitions filed by Xiaomi Technology India Pvt Ltd and its Chief Financial Officer Sameer B.S. Rao, seeking to quash the proceedings initiated by the Enforcement Directorate (ED) in connection with alleged violations under the Foreign Exchange Management Act (FEMA) involving royalty payments of Rs 5,551 crore.

Justice N. Anand Venkatesh, delivering the verdict recently, held that the court would not interfere at the "formation of opinion" stage of proceedings under FEMA adjudication rules, as it was only a preliminary step and not a final determination of liability.

Xiaomi India is engaged in the procurement, distribution, and sale of Xiaomi-branded products across India. In this context, the company entered into royalty agreements with Qualcomm Incorporated, Qualcomm Technologies Inc. (both US-based entities), and Beijing Xiaomi Mobile Software Co. Ltd, a group company based in China.

According to the ED, Xiaomi remitted Rs 5,551 crore between 2016 and 2022 to these foreign entities as royalty payments, allegedly without obtaining prior approval from the Reserve Bank of India (RBI) -- a requirement under FEMA for certain types of foreign remittances, especially where third-party transactions are involved.

Following its investigation, the ED filed a complaint, and a show-cause notice was issued by the Adjudicating Authority under FEMA, which Xiaomi challenged before the High Court in April 2024.

Appearing for Xiaomi, senior advocate K.G. Raghavan contended that the royalty payments were legitimate current account transactions and therefore did not require the RBI’s prior approval. He argued that the ED’s initiation of adjudication proceedings was unwarranted.

However, Additional Solicitor General L. Sundaresan, representing the ED, submitted that the writ petition was premature, as the adjudication process was still at the stage of forming an opinion.

He argued that this stage only requires prima facie material suggesting a contravention of FEMA provisions, and need not be based on conclusive findings.

Sundaresan also cited a communication from Qualcomm, wherein Xiaomi was referred to as a “third party” remitting payments on behalf of foreign group entities -- an act which, according to the ED, constitutes a violation under the FEMA.

Accepting the ED’s submissions, the High Court held that interference at this stage was unwarranted and permitted the adjudication proceedings to continue. Consequently, Xiaomi’s plea challenging the show-cause notice and the formation of opinion was dismissed.

"In the considered view of this Court, the case has now reached the stage under Rule 4(4) of the FEMA Rules, which is the stage of defence and therefore, the petitioners will be entitled to all the documents sought by them, including the non-RUDs," the court said in its judgement delivered on June 26.

--IANS

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