Xiaomi has no pact with Qualcomm, misled bank, says ED

Xiaomi Qualcomm
mi logo of Xiaomi Corporation. Image by lcv | Bigstockphoto

India’s Enforcement Directorate (ED) has argued Chinese handset maker Xiaomi India does not have any pact with Qualcomm to pay royalties to the US chipmaker.

The ED further said that with no agreement in place, Xiaomi India can’t be making payments to Qualcomm, objecting to the handset company’s petition in the Karnataka High Court, challenging the agency’s order to freeze assets worth over Rs 5,500 crore for alleged FEMA violations.

The government agency, which probes forex law violations, said that the Chinese company’s petition is not maintainable since Foreign Exchange Management Act (FEMA) acts as a court in itself. It further said that its orders cannot be challenged in courts that do not have jurisdiction.

Xiaomi India not part of parent group

“Xiaomi India is not part of the parent group in China, but is instead registered as a subsidiary of Xiaomi Hong Kong and Singapore, which also does not have royalty agreements in place. As a result, the royalties paid by Xiaomi India, which, according to the government, acts merely as a distributor and reseller of smartphones in India, are in violation of the foreign exchange rules of India,” Deputy solicitor general MB Nargund, who appeared on behalf of ED, was quoted as saying by The Economic Times.

The Chinese handset maker had previously challenged the constitutional validity of section 37A of FEMA, which grants central agencies power of search and seizure of assets. However, the ED further challenged Xiaomi’s arguments and said that the handset company’s India shareholders are all foreigners and they have no grounds to challenge constitutional validity of Indian legislation.

Other than this, India’s top handset maker had argued that the ED’s order to freeze $670 million of its bank assets in April had violated its freedom to practice any profession, trade or business. The agency, however, countered by saying that freedom is only available to Indian citizens.

Xiaomi will reply to the ED’s objections on November 13 at the next hearing, the report said.

The ED informed the court that Xiaomi India misled its banker Deutsche Bank AG for years by claiming it had an agreement for payment of royalties when it had none, legal documents showed.

No agreement with Qualcomm

A separate Reuters report, citing court documents containing the enforcement agency’s findings, said a Deutsche Bank India executive confirmed to the agency in April that Indian law required the drawing up of a legal agreement between Xiaomi India and Qualcomm to make royalty payments, and the smartphone company disclosed to the bank that such an agreement existed.

Xiaomi’s India CFO, Sameer B. S. Rao, and its managing director at the time, Manu Kumar Jain, admitted there was no agreement between Qualcomm and Xiaomi India, and the royalties were remitted based on directions received from the group’s executives in China, the ED documents revealed.

Related article: Illegal remittances cost Xiaomi India over $725mn

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