Xiaomi has challenged an Indian tax ruling alleging it evaded $72 million in tariffs on royalty payments, according to legal documents. The Chinese firm and its lawyers say the case will test India’s legal framework governing contract manufacturing.
Xiaomi, a major player in the Indian smartphone market, has for years had its contract manufacturers in the country import parts from China, pay customs duties and then assemble the devices.
But in November, an Indian tax tribunal ruled those import values had been undervalued for at least three years as they failed to include the 2% to 5% royalties that Xiaomi paid to foreign firms like Qualcomm for using their technologies in components.
In a Supreme Court challenge, Xiaomi argued that the tax tribunal erred by saying it was the “beneficial owner” of the components while requiring it to pay tax on the royalties. Xiaomi has asked that the ruling be overturned.
The implications of the tribunal’s ruling are far-reaching as they indicate “an implicit mistrust of the entire contract manufacturing industry,” Xiaomi said in a filing dated January 15, which is not public but was reviewed by Reuters.
Precedent-Setting Case
Xiaomi’s former contract manufacturers, Flextronics Technologies India, a unit of U.S.-listed Flex, and Bharat FIH, a unit of Taiwan’s Foxconn, are also opposing the tax tribunal’s decision at the top court, according to the sources.
Tax lawyers say the case is being closely watched by global investors and companies who have bet big on India.
A ruling in favour of Indian authorities could increase scrutiny of the royalty agreements that many importing companies have in sectors including pharmaceuticals, autos and manufacturing, lawyers said.
Xiaomi’s Headaches
According to Indian law, the customs tax demand of $72 million could rise to more than $150 million with interest and penalties if Xiaomi India loses in court. That could put a strain on the company as its profits were $31.7 million in the 2023-2024 financial year.
On top of that, around $610 million of Xiaomi India bank funds have been frozen by a federal financial crime-fighting agency, the Enforcement Directorate, since 2022 due to allegations of illegal remittances. The company has denied the allegations.
In November, the Indian tax tribunal said Xiaomi “indulged in deliberate suppression of facts” and royalties need to be taxed as the company is paying for technology that is critical to the imported parts.
(With inputs from Reuters)
