Xiaomi challenges India tax authority over tariffs on royalties in closely watched case

Core Viewpoint - Xiaomi is challenging an Indian tax ruling that claims the company evaded $72 million in tariffs on royalty payments, which could have significant implications for the contract manufacturing industry in India [1][3][6]. Group 1: Tax Dispute Details - An Indian tax tribunal ruled that Xiaomi undervalued import values for at least three years leading up to 2020 by not including 2% to 5% royalties paid to foreign firms like Qualcomm [2]. - Xiaomi argues that the tribunal incorrectly classified it as the "beneficial owner" of the components, which led to the tax on royalties [3]. - The tribunal's decision is seen as damaging to established practices in the manufacturing sector, according to Xiaomi [4]. Group 2: Implications and Reactions - The case is being closely monitored by global investors and companies, as a ruling in favor of Indian authorities could increase scrutiny on royalty agreements across various sectors [6]. - If the ruling is upheld, it may empower authorities to seek taxes on other related payments made by companies exercising effective control over imported goods [6]. - Xiaomi's former contract manufacturers, Flextronics and Bharat FIH, are also contesting the tribunal's decision in the Supreme Court [5]. Group 3: Financial Impact - The customs tax demand of $72 million could escalate to over $150 million with interest and penalties if Xiaomi loses the case, which could strain the company's finances given its profits of $31.7 million in the 2023-2024 financial year [9]. - Additionally, approximately $610 million of Xiaomi India's bank funds have been frozen due to allegations of illegal remittances, further complicating the company's financial situation [10]. Group 4: Legal Proceedings - During a recent hearing, Xiaomi's lawyer argued that import taxes should be paid by the importers (contract manufacturers) and that royalties should not be taxable as they are not linked to imports [11]. - The Indian tax tribunal accused Xiaomi of "deliberate suppression of facts," asserting that royalties need to be taxed as they are for critical technology related to imported parts [11].