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The Legal Affair

Let's talk Law

The Legal Affair

Let's talk Law

Karnataka High Court Rejects Xiaomi Technology’s Challenge to Constitutionality of Section 37-A of FEMA

Karnataka High Court Rejects Xiaomi Technology’s Challenge to Constitutionality of Section 37-A of FEMA

Factual Background 

In the matter of Xiaomi Technology India Pvt Ltd. v. Union of India petition asking for the cancellation of the seizure order issued under Sections 37-A(1) and (3) of the Foreign Exchange Management Act, 1999 (FEMA), and challenging the constitutionality of Section 37-A.

Since its incorporation in 2014, Xiaomi Technology has been sourcing Xiaomi goods in India, including smartphones, TV accessories, and other gadgets. Xiaomi learned that summonses had been issued under Sections 131(1) of the Income Tax Act of 1961 and Sections 37-A(1) and (3) of the FEMA in February 2022. The Directorate of Enforcement opened investigations into Xiaomi after receiving information from the Income Tax agency regarding certain royalty payments made to overseas organisations. Xiaomi asserted that it was entitled to use Qualcomm’s proprietary and standard essential patents in the mobile phones it sells. Xiaomi asserted that these patents are necessary for the operation of its mobile phone and other devices, hence it pays royalty fees to Qualcomm for their use. The Subscriber Unit Licence Agreement between Xiaomi Inc. and Qualcomm served as the foundation for the royalties. A seizure order for INR 5551,27,15,824 was communicated to Xiaomi by the ED in 2022 in accordance with Section 37-A of the FEMA. According to the seizure order, there are grounds to suspect that the group’s foreign currency held outside of India is part of the royalties paid by the petitioner to Qualcomm. The assailed ruling further outlined the reasons for the seizure, stating that the ED had not discovered any agreements or legitimate legal justifications for the petitioner’s money transfers. Royalties and intellectual property rights were not included in the price of the goods.

Submission from Parties 

According to the appellant, Section 37A exhibits evident arbitrariness because it grants “unbridled and unguided power”. After all, even the slightest suspicion can result in a seizure order. Additionally, the provision violates Article 14 of the Constitution because there are no rules defining the grounds for belief.

The Respondent argued that Section 37A had adequate protections and that the purpose of this provision was to address the problem of black money being stashed outside of India under the guise of business.

Conclusion 

Even though Xiaomi’s challenge to the FEMA provision is maintainable based on the claim that it violates Article 14 of the Constitution, Section 37-A of FEMA is not ultra vires the Constitution as it does not manifest any arbitrariness on any grounds whatsoever, according to the single judge bench of the Karnataka high court, Justice M. Nagaprasanna.

The Court emphasised that an organisation with roots outside of India may contest the constitutionality of Indian laws because they infringe upon fundamental rights. The petitioner’s challenge is based on the claim that Section 37A exhibits arbitrariness, and the Court noted that Art. 14 of the Constitution is “person-centric”; as a result, the petition is applicable. The petitioner may approach the Tribunal under Section 37A (5) to exercise his or her right to appeal, the Court ruled in rejecting the challenge to Section 37A’s validity.