Karnataka High Court: In the instant petition challenging the constitutional validity of Section 37-A of Foreign Exchange Management Act, 1999 (FEMA), and, seeking quashment of seizure order under Section 37-A(1) and (3) of FEMA, the Bench of M. Nagaprasanna, J.*, while stating that even though Xiaomi’s challenge to the FEMA provision is maintainable on the fulcrum of the allegation that it is violative of Article 14 of the Constitution; however, Section 37-A of FEMA is not ultra-vires the Constitution as it does not manifest any arbitrariness on any ground whatsoever.
Background- Xiaomi Technology got incorporated in 2014 as subsidiary of Xiaomi Singapore Pvt Ltd and Xiaomi HK Ltd. and has been engaging in procuring Xiaomi products (known as MI) like mobile phones, TV accessories, smart phones etc. in India.
In February 2022, Xiaomi became aware of summons issued under Section 37-A(1) and (3) of FEMA r/w Section 131(1) of Income Tax Act, 1961. Investigations were initiated against Xiaomi by the Directorate Enforcement based on the inputs received from the Income Tax department vis-à-vis certain remittances of royalty made to foreign entities such as- Qualcomm Inc and Qualcomm Tech Inc; Beijing Xiaomi Mobile Software Co.
Xiaomi claimed to be a beneficiary of Qualcomm’s proprietary and standard essential patents that are used in mobile phones sold by it. Xiaomi claimed that these patents are essentials for the functioning of its mobile phone other gadgets, therefore it pays royalty to Qualcomm for the usage of the same. The royalties were based on the Subscriber Unit License Agreement between Xiaomi Inc and Qualcomm.
In 2022, the ED communicated to Xiaomi a seizure order of INR 5551,27,15,824 under Section 37-A of FEMA. The seizure order stated that there were reasons to believe that royalty paid by the petitioner to Qualcomm is foreign exchange held outside India by the group. The impugned order further stated the reasons of seizure being that the ED did not find any agreement or available legal basis for remitting money by the petitioner. Royalty was not part of the product cost and no intellectual property rights were received.
Contentions: Counsels representing Xiaomi Technology, contended that Section 37A suffers from manifest arbitrariness as it gives “unbridled and unguided power” as mere suspicion can lead to a seizure order. Furthermore, there are no guidelines determining the reasons to believe, thereby making the provision violative of Art. 14 of the Constitution.
Per contra, the respondents contended that Section 37A has sufficient safeguards and the Legislative intent behind this provision is to tackle the menace of black money parked outside India in the garb of business.
Court’s Assessment:
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Considering the issue of maintainability, the Court noted that the petitioner company though registered in India, has its roots in China. The Court pointed out that a Company which has its roots outside India, can challenge the constitutional vires of the Indian laws on the ground that it violates the fundamental rights. The Court pointed out that Art. 14 of the Constitution is “person centric”; and since the petitioner’s challenge is on the ground that Section 37A manifests arbitrariness, therefore, the petition is maintainable.
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Vis-à-vis the issue of Section 37A giving “unbridled and unguided power”, the Court delved into the legislative origin of the impugned provision. The Court stated that as per Section 37A acquisition, holding, owning, possessing or transfer of any foreign exchange from India to outside of India is an offence under the impugned Section. Referring to a plethora of Supreme Court cases where it discussed “manifest arbitrariness”, the High Court upon a detailed analysis of all the 6 sub-clauses of the impugned provision, pointed out that suspicion may trigger seizure, but the seizure by itself is not final as there are several procedures after seizure. Therefore, the contention that Section 37A manifests arbitrariness is a fundamentally flawed argument. The Court further pointed out that Section 37A does not have one rung or 2 rung of safeguards and checks, the provision at every rung provides a safeguard.
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Regarding the 3rd issue of impugned seizure order issued by the Authorised Officer being devoid of application of mind, the Court noted that the impugned order is neither cryptic nor perfunctory, in fact it is a 250- page order and irrespective of the number of pages, the impugned order shows application of mind.
With the afore-stated analysis, the Court rejected the challenge to the vires of Section 37A and stated that the petitioner can approach the Tribunal under Section 37A (5) to avail the remedy of appeal.
[Xiaomi Technology India Pvt Ltd. v. Union of India, 2023 SCC OnLine Kar 24, decided on 21-04-2023]
*Judgment by Justice M. Nagaprasanna
Advocates who appeared in this case :
Petitioner- Uday Holla, Sr. Adv a/w Aditya Vikaram Bhat, Deepak Chopra, Harpreet Singh, Radhika V. and Mithel Reddy, Advs;
Respondents- M.B. Nargund, Additional Solicitor General a/w Madhukar Deshpande, Adv.
