Chinese smartphone maker Xiaomi alleged that its top executives faced threats of “physical violence” and coercion during questioning by the Enforcement Directorate (ED), Reuters reported on May 7.
Late last month, ED seized Rs 5,551.27 crores from the bank accounts of Xiaomi for illegally remitted funds to three foreign-based entities, but on May 6, the Karnataka High Court put on hold the enforcement agency’s decision and scheduled the next hearing on May 12. The company is the leading smartphone manufacturer in India with a one-fourth market share.
According to court filings seen by Reuters, officials from the ED warned the company’s former India managing director, Manu Kumar Jain, and current Chief Financial Officer Sameer B.S. Rao, and their families of “dire consequences” if they did not submit statements as desired by the agency. The executives “were able to resist the pressure for some time, (but) they ultimately relented under such extreme and hostile abuse and pressure and involuntarily made some statements,” it added.
ED refuted these charges as “untrue and baseless,” saying that the company executives had deposed “voluntarily in the most conducive environment.”
Earlier story (May 2):
The Enforcement Directorate (ED) has seized Rs 5,551.27 crores from the bank accounts of Xiaomi India under the Foreign Exchange Management Act, 1999 (FEMA) as part of an ongoing investigation into the company’s financial activities, the agency said in a press release on April 29.
Xiaomi India distributes Android OS phones under the popular brand name ‘Mi’. It is a wholly-owned subsidiary of the Chinese Xiaomi Group. This action comes just a few weeks after the ED summoned Xiaomi Group’s former India head and current global vice-president Manu Jain for questioning on April 13. The agency has been probing Xiaomi over alleged forex violations since February 2022.
What are the allegations?
According to the press release, since commencing its India operations in 2014, “the company [Xiaomi] has remitted foreign currency equivalent to Rs 5,551.27 crore to three foreign-based entities which include one Xiaomi group entity, in the guise of royalty.” The agency has further alleged that these royalty payments were made under the instructions of the parent Xiaomi Group.
“The amount remitted to the other two US-based unrelated entities were also for the ultimate benefit of the Xiaomi group entities,” the ED alleged.
Citing the fact that Xiaomi India procures all its phones and other products readymade from Indian manufacturers, the investigation noted that none of these three royalty recipient groups had done any business with Xiaomi India. It has allegedly violated Section 4 of FEMA by shuffling thousands of crores in foreign exchange within its own parental entities. “The Company also provided misleading information to the banks while remitting the money abroad,” the ED said.
What is Section 4 of FEMA?
FEMA 1999, allows foreign exchange trading in India but with many caps, checks, and balances. One can trade in foreign exchange only via the three official channels: the Bombay Stock Exchange, National Stock Exchange, and Metropolitan Stock Exchange. Specifically, Section 4 of FEMA deals with the holding of foreign exchange:
“Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India.”
Royalty fees paid to foreign entities cannot exceed 5 percent on local sales and 8 percent on exports while a lump sum payment cannot cross USD 2 million, according to a circular issued by the RBI. In Xiaomi’s case, the ED alleged that the company has violated FEMA by using loopholes in the RBI’s guidelines to accumulate foreign exchange reserves in its subsidiaries’ offshore banks.
Xiaomi pleads innocence, is there a pattern?
Xiaomi India has continued to maintain its innocence in the matter. “We have studied the order from government authorities carefully. We believe our royalty payments and statements to the bank are all legit and truthful,” the company said in a statement released following the raids. “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,” it added.
However, Xiaomi is not the only Chinese company facing the heat. Over the past six months, other smartphone manufacturers like Huawei, Oppo, and Taiwan-based Foxconn have all faced the brunt of the Indian government’s investigations. In March 2022, Huawei faced a similar accusation as Xiaomi where the Income Tax Department alleged that the former had made inflated payments worth over Rs 500 crores against receipt of technical services from related parties outside India.
Xiaomi was also raided earlier in January by another arm of the Indian tax administration, the Directorate of Revenue Intelligence, on the basis that the “royalty and license fee” paid by Xiaomi India were not being added to the transaction value of the goods imported by the company and its contract manufacturers. The DRI issued three show-cause notices to Xiaomi, demanding the recovery of taxes worth Rs 653 crore. The ED’s investigation of the company began shortly thereafter.
Why are Chinese tech companies under scrutiny in India?
Ever since Indo-China border tensions reignited in 2020, the Indian government has cracked down on Chinese tech companies and banned several apps including ByteDance-owned TikTok and the Tencent-published version of PUBG within a few days of the border skirmishes.
However, the Indian government has made it clear that this newest round of tax raids is not targeting Chinese entities in particular. The raids have also elicited a response from Beijing. A Communist Party member has stated, “The Indian authorities concerned have taken a series of measures to suppress Chinese companies and their products in India, which seriously damages the legitimate rights and interests of Chinese companies.”
Although, bilateral trade figures speak to the contrary. In 2021, the bilateral trade volume between the two countries reached $125.7 billion, a 43 percent year-on-year increase.
Update (May 9, 1:30 pm): The original story published on May 2 was updated to include the latest developments. The headline was changed accordingly.
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