Xiaomi in Trouble again in Royalty - Payment of Royalty as a Tool to Transfer Foreign Exchange Out of India Alleged

· DRI says Foreign Banks did not do due diligence FEMA should have Examined Technical Collaboration Agreement with Receiver!

· GST on Royalty Payment must for Remittance, RBI can take Action Against Banks

New Delhi: The “adjudicating authority has issued showcause notices to Xiaomi Technology India Pvt Ltd and three banks - Citibank, HSBC Bank and Deutsche bank AG - for contravention of Section 10(4) and 10(5) of FEMA and directions issued by RBI by allowing foreign outward remittances in the name of royalty through the banks without conducting due diligence and without obtaining any underlying technical collaboration agreement from the company”, the ED has said.

“The Authority while confirming the seizure held that ED is right in holding that foreign exchange equivalent to Rs 5,551.27 crore has been transferred out of India by Xiaomi India in an unauthorized manner and is held outside India in contravention of FEMA and the same is liable to be seized,” the ED said. The competent authority also observed that “payment of royalty is nothing but a tool to transfer the foreign exchange out of India and the same is in blatant violation of provisions of FEMA”.

The ED’s investigation against Xiaomi, which started last year, revealed that the company had 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.” 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,” according to the ED.