Karnataka, India: On April 21, the Karnataka High Court rejected the Chinese electronics manufacturer’s Indian arm Xiaomi Technology India Pvt Ltd’s plea challenging the order issued by the Enforcement Directorate (ED) seizing Rs 5,551.27 crore of the company’s assets in India on suspicion of violation of Foreign Exchange Management Act (FEMA), 1999.
The Chinese manufacturer approached the Court challenging the constitutional validity of section 37 of the FEMA, arguing that the provision is violative of Articles 14, and 20 read with Articles 300A and 301 of the Constitution of India. The impugned provision allows the Government of India’s (GoI) authorised officer to seize a company’s assets in India on suspicion of violation of FEMA.
Xiaomi argued that the impugned provisions contain ambiguous language as it uses phrases ‘reason to believe’ and ‘suspected’ in the same breath while granting unfettered powers to the GoI’s official to seize a company’s assets.
The Chinese manufacturer submitted that section 37A does not have a timeline. Xiaomi submitted that once the GoI’s authorised official passes the order and the competent authority confirms it, then such an order can remain in operation till the final adjudication of the case. Furthermore, the Chinese manufacturer claimed that it is being singled out and the impugned amount was transferred to Qualcomm for royalty payments through proper channels.
The GoI’s counsel Additional Solicitor General MB Nargund argued that the GoI’s endeavour is to bring back the amounts parked outside India. The ASG argued that the GoI would drop the prosecution once the Chinese manufacturer brings back the funds to India. The ASG said, “The amount parked outside is around Rs 5,551 crores, so we have attached it. Even if today the petitioners bring it back, the attachment order goes and so will the prosecution.”
Furthermore, the ASG argued that proper procedure was followed to pass the attachment order and the action was scrutinised by a Competent Authority not belonging to ED. The ASG stated the attachment action was scrutinised by an official, not below the rank of Joint Secretary from another department.
The ASG argued, “Section 37A has enough safeguards and also provides appeal opportunity. Therefore, how can it be called arbitrary. So many checks and balances are available thus it cannot be said to be arbitrary,” while placing reliance on the impugned provision.
Thereafter, the Court upheld the impugned provision’s constitutional validity stating that it does not suffer from arbitrariness. On November 17, 2022, the Court reserved its verdict in the case. The Court rejected Xiaomi’s challenge to section 37A’s constitutional validity, however, it granted the Chinese manufacturer the liberty to avail statutory remedies available under the provision. The Court said, “The writ petition is rejected, but the rejection of the petition will not come in the way of the petitioner availing remedy of appeal under section 37A (5) of the Act, in accordance with law.”
Maintainability of Xiaomi’s Plea
The ASG argued that Xiaomi’s plea is not maintainable as the company is a foreign entity. The ASG said, “It doesn’t even have voting right. A challenge can only be limited to the proceedings initiated and no challenge to the constitutional validity of the section is maintainable.”
The Court held, “Challenge to the Constitutional validity of Section 37A of the Act by the petitioner is held to be maintainable, on the fulcrum of the allegation that it is violative of Article 14 of the Constitution of India. As Article 14 is person centric whereas Fundamental Rights under Article 19 are citizen centric.”
Background
The ED seized Rs 5,551.27 crore from the Chinese manufacturer’s Indian arm under FEMA in connection to illegal remittances made by the company. In 2022, the ED said in a press release, “Xiaomi India is a wholly owned subsidiary of China based Xiaomi group. This amount of Rs. 5551.27 Crore lying in the bank accounts of the company has been seized by the ED. ED had initiated investigation in connection with the illegal remittances made by the company in the month of February this year.”
“The Company started its operations in India in the year 2014 and started remitting the money from the year 2015. The Company has remitted foreign currency equivalent to INR 5551.27 Crore to three foreign based entities which include one Xiaomi group entity in the guise of Royalty,” the ED said.
“Such huge amounts in the name of Royalties were remitted on the instructions of their Chinese parent group entities. The amount remitted to other two US based unrelated entities were also for the ultimate benefit of the Xiaomi group entities,” the ED added.
The ED’s press release said, “The Xiaomi India has not availed any service from the three foreign based entities to whom such amounts have been transferred. Under the cover of various unrelated documentary façade created amongst the group entities, the company remitted this amount in guise of Royalty abroad which constitute violation of Section 4 of the FEMA. The Company also provided misleading information to the banks while remitting the money abroad.”
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