They say the Enforcement Directorate’s investigation into Xiaomi India’s royalty payments has larger implications for overseas companies including rival Chinese ones, creating an uncertain environment, and could hurt the larger electronics manufacturing ecosystem.
The ED has termed Xiaomi India’s royalty payments as illegal and a violation of the Foreign Exchange Management Act (FEMA), saying it is registered as a reseller and thus, shouldn’t be making royalty payments, especially as such pacts are between the company’s Chinese parent and the patent holder. The ED has subsequently frozen the company’s bank assets worth over ₹5,500 crore, which Xiaomi India has challenged in court. The order has been reserved by the Karnataka High Court.
Legal experts ET spoke to said Chinese companies will need to relook at the licence agreements, upon fears of an impending investigation, and ensure they are comprehensive and expressly contain clauses dealing with terms and conditions of royalty payments, providing descriptions of intangibles and benefit accrued.
“Whether royalty is embedded in import/sales price, and details of the owner of the parent, etc. are included…Also, proper valuation reports and justifications are required, more so if the remittance is more than in accordance with standard computation,” said Vikrant Singh Negi, partner, DSK Legal.
The ED has also charged Vivo India for money laundering, alleging that more than 50% of its turnover has been transferred to China to avoid paying taxes in India. Oppo, too, has been charged by the directorate of revenue intelligence for customs duty evasion to the tune of ₹4,389 crore.
All three companies have denied any wrongdoing. Vivo and Xiaomi have also dragged the ED to court.
The scrutiny around royalty payments by government agencies can also have a larger impact on the patent licensing ecosystem, which serves as the backbone for regional subsidiaries to get their product manufactured from contract manufacturers using standard essential patents under licences signed on a global level, legal experts said.
“These are global players. In most of these cases, these are global patent licensing agreements. They are not region-to-region specific,” said Yogesh Pai, associate professor at National Law University.
A Delhi-based legal academic said it is quite possible that the global licensing agreements will have provisions to ask the regional subsidiaries to pay up their part of the royalties from their books.