ED seizes Rs 5,500 crore of Xiaomi in FEMA case

Xiaomi India is a wholly owned subsidiary of the China-based Xiaomi Group. “This amount of Rs 5,551.27 crore lying in the bank accounts of the company has been seized by the ED,” the agency said. Sources said the agency is investigating the company’s foreign funding, shareholding, financial statements and related activities. Jain’s statement had been recorded at the agency’s Bengaluru office.

The company denied any wrongdoing and said it would cooperate with government agencies.

“As a brand committed to India, all our operations are firmly compliant with local laws and regulations. We have studied the order from government authorities carefully,” said a Xiaomi spokesperson. “We believe our royalty payments and statements to the bank are all legit and truthful. These royalty payments that Xiaomi India made were for the in-licensed technologies and IPs (intellectual property) 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.”

ED’s probe is part of the larger action undertaken by various law and revenue enforcement agencies following an alert by intelligence agencies against Chinese firms. Indian agencies have been pursuing Chinese entities over alleged money laundering and other violations in the past few months, having banned several China-based apps following border tensions last year.

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The development comes two years after the Indian government had banned short-form video apps TikTok and SnackVideo in 2020, but a similar app — Zili — continues to be operated by Xiaomi, which also sells devices under the Mi brand name.

The Ministry of Corporate Affairs (MCA) recently registered more than 700 cases across the country against companies that have Chinese nationals as promoters and directors over suspicious transactions or dubious credentials. The intelligence inputs from the home ministry stated that these firms were misused for various purposes, including evasion of taxes and money laundering, sources said. The cases have been registered by the Registrar of Companies (RoC) at local police stations under various sections of the Indian Penal Code (IPC) and the Information Technology (IT) Act. Sources added that the maximum number of cases have been registered in Delhi, followed by Bengaluru and Mumbai.

Other than the ED and MCA, the income tax department has also taken action against Chinese-owned smartphone companies.

According to the ED, in the case of Xiaomi India, the company started its local operations in 2014 and began remitting money in 2015. The company has remitted foreign currency equivalent to Rs 5,551.27 crore to three foreign-based entities that include one Xiaomi Group unit as royalty payments.

“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 statement added.

Xiaomi India procures completely manufactured mobile sets and other products from local manufacturers and has not availed of any service from the three foreign-based entities to which such amounts have been transferred, the agency said.

“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,” the ED said.

The ED probe follows investigations carried out by the income tax (IT) department, which had raided Xiaomi and other smartphone players in the past, people familiar with the development told ET. Tax sleuths said they had seized data allegedly corroborating charges of tax evasion during the searches.

The I-T department said its searches had brought to the fore a unique modus operandi whereby foreign funds were introduced into the books of the Indian company. However, the source of such funds was “of doubtful nature,” it said. “The quantum of such borrowings is about Rs 5,000 crore, on which interest expenses have also been claimed,” it added.

It had also said that one of the Xiaomi companies had inflated expenses and payments on behalf of associated enterprises, which led to a reduction in taxable profits of the mobile handset manufacturer in India. “Such an amount could be in excess of Rs 1,400 crore,” it said.