What went wrong with Xiaomi's dream journey in India?

Chinese consumer electronics company Xiaomi Technology India Private Limited is again in news. The company, which is one of the market leaders in India's smartphone market, had hogged the limelight for offering popular and affordable smartphones and best-in-class hardware at the best rates. But the company has also grabbed the Indian government’s attention due to legal complications.  

The company came into the limelight after the central probe agency Enforcement Directorate (ED) seized over Rs 5,500 crore from Xiaomi over violations of the Indian foreign exchange law. 

What’s the case 

Xiaomi India is a trader and distributor of mobile phones in India under the brand name of MI. Xiaomi India procures completely manufactured mobile sets and other products from manufacturers in India. The company started its operations in India in 2014.  

The 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. 

As per the charges levelled by ED, Xiaomi India remitted the huge sum under the guise of royalty from three companies, one of which was a Xiaomi group entity. While investigating the case, ED found that Xiaomi India started remitting foreign currency equivalent to Rs 5,551.27 crore since 2015, a year after it began its India operations. 

ED said 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,” its statement read. 

WATCH: Is it the end of Xiaomi's dream run in India? 

The central financial-crime fighting agency further 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 in its statement. 

Xiaomi’s defence and action 

In its defence, Xiaomi India said that the company is committed to India and that it adheres to 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,” the company said after ED's action.  

Earlier this month, the company approached the Karnataka High Court and challenged the September 29, 2022 order of the Foreign Exchange Management Act (FEMA) Competent Authority, which confirmed the April 29 seizure order of the ED. 

The company had approached the HC earlier this year against this order. The HC had, however, ordered it to approach the Competent Authority under FEMA. 

New petition 

On October 7, in a new petition, Xiaomi challenged the Competent Authority’s order on grounds that a representative of a foreign bank was not allowed to be examined during the hearing.  

The company’s advocate argued that since the petition has also challenged the validity of Section 37A of FEMA which relates to assets held outside India by a company, the petition was maintainable. 

In other case 

Earlier, the Income Tax department had slapped a notice for tax evasion in December 2021. The Central Board of Direct Taxes (CBDT), in a statement in December 2021, noted that the company has made remittance in the nature of royalty, to and on behalf of its group companies located abroad, which aggregates to more than Rs 5,500 crore. 

A week after the raids were conducted, the Directorate of Revenue Intelligence (DRI) issued three showcause 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. 

What’s at stake 

The Indian smartphone market is mainly dominated by Chinese players with Xiaomi having around 23 per cent, Vivo nearly 15 per cent, Realme around 15 per cent, and Oppo having around 10 per cent market share, based on Mobile Devices Monitor data of 2021. Xiaomi was India's leading smartphone seller in 2021, with a 24 per cent market share, according to Counterpoint Research.  

With growing legal tussles, there were rumors that the company might be shifting its base to Pakistan.  

In a reply to a tweet by South Asia Index of moving its operations to Pakistan ‘false and baseless’ amid legal complications, Xiaomi has said the reports are baseless and that its brand is a successful example of Make in India journey as 99 per cent of their smartphones and 100 per cent of our TVs are manufactured in India.