Xiaomi moves Supreme Court against $72M tax demand in India
What's the story
Xiaomi, a leading player in India's smartphone market, has challenged an Indian tax tribunal's ruling that accused the company of evading $72 million in tariffs on royalty payments. The dispute is seen as a test case for India's contract manufacturing legal framework. The tribunal had said that Xiaomi's import values were undervalued for at least three years leading up to 2020, as they didn't include royalties paid to foreign firms like Qualcomm.
Legal challenge
Xiaomi contends that the tax tribunal erred in its ruling
In its Supreme Court challenge, Xiaomi contended that the tax tribunal was wrong in labeling it as the "beneficial owner" of the components while also taxing it on royalties. The company has sought to overturn this ruling. The implications of this decision are huge as they show "an implicit mistrust of the entire contract manufacturing industry," Xiaomi said in a filing dated January 15, which Reuters reviewed.
Industry concerns
Ruling in favor of Indian authorities could have widespread implications
The tribunal's decision, Xiaomi said, "grievously injures the established practices of (the) manufacturing sector." Notably, Xiaomi's ex-contract manufacturers Flextronics Technologies India and Bharat FIH are also challenging this tax tribunal decision in Supreme Court. Tax lawyers say this case is being closely watched by global investors and companies with major investments in India. A ruling favoring Indian authorities could lead to increased scrutiny over royalty agreements across various sectors including pharmaceuticals, autos, and manufacturing.
Future impact
Tax lawyer on the potential impact of the ruling
Tarun Jain, a tax lawyer based in New Delhi, said the SC ruling will be "widely significant as it will specify the powers of Indian customs." He added that if upheld, it could give authorities the power to levy taxes on other payments made by firms who may be exercising effective control over goods being imported by their partners.
Financial strain
Financial strain on Xiaomi India if it loses in court
If Xiaomi India loses in court, the customs tax demand of $72 million might exceed $150 million with interest and penalties. This could put a financial strain on the firm as its profits were only $31.7 million in FY 2023-2024. To make matters worse, some $610 million of Xiaomi India's bank funds have been frozen by the Enforcement Directorate since 2022 over alleged illegal remittances. The company has denied these allegations.