Xiaomi India writ petition challenging ED order seizing its bank accounts premature: Karnataka High Court

The Karnataka High Court on Tuesday held that the petition filed by technology company Xiaomi India challenging an order of the Enforcement Directorate (ED) seizing seizing ₹5,551.27 crore from its bank accounts was premature [Xiaomi Technology India Private Limited v. Union of India]..The single-judge Bench of Justice SG Pandit held that though the company had no alternative remedy against the seizure order, the writ petition was filed prematurely..Xiaomi India had moved the High Court challenging a provisional attachment order passed by the ED seizing its bank accounts. The agency had contended that the company had contravened provisions of the Foreign Exchange Management Act (FEMA) by making unauthorised payments to foreign companies situated outside India..Before the High Court, Xiaomi had argued that the technology royalty payments made by the company to foreign companies situated outside India - including Qualcomm and Beijing Xiaomi Software Company Limited - were not in contravention of Section 4 of the FEMA. Further, the payments had been considered lawful by the Income Tax Department, which treated them as deductions, it was stated.Technology royalty payments were made by the company from 2015-16 till date through authorised dealers, and there was no evidence to show that Xiaomi was in possessing foreign exchange outside India. Thus, the order passed by the ED using its powers under Section 37A of the FEMA was unsustainable, it was argued.The seizure of the bank accounts by the ED was disrupting the business of the company and was preventing it from paying salaries and wages to its employees, the Court was told. Counsel for the company further said that the attachment order would lead to its "civil death".Another point raised was that the company was constrained to approach the High Court since the Appellate Tribunal under the Act was not functional owing to a lack of personnel..Counsel for the ED argued that the writ petition was premature since there was an alternate remedy under Section 37A of the FEMA. It was contended that since Xiaomi India did not use any intellectual property of its Chinese company or of Qualcomm, it could not have paid any royalty for the same. Thus, the amount transferred by Xiaomi India to these two entities would attract Section 4 of the FEMA, which restricts the dealing or transfer of any foreign exchange. As a result, the company could not contest the jurisdiction of the ED to initiate proceedings against it under Section 37A of the FEMA..The Court noted that under the Act, the authorized officer who passes the seizure order is required to place the same before the Competent Authority under the Act within a period of 30 days. The Competent Authority is required to decide on the same within 180 days, after giving an opportunity of hearing to the aggrieved parties. This order can be appealed before the Appellate Authority.At the stage of seizure, the petitioner is not required to be given an opportunity to be heard, and the same arises only before the competent authority, the Court further noted. Therefore, at this stage, it cannot be accepted that petitioner is provided with alternate remedy. The judgment stated,"The seizure order passed by the Authorized Officer is not final and before confirming the said seizure order, petitioner would be provided with an opportunity to have his say in the matter. The petitioner could very well convince the Competent Authority that the payment of royalty by the petitioner to Qualcomm and Beijing Xiaomi Software Company Limited is in the nature of running royalty and is being paid for the use of SEPs and other licensed intellectual property in respect of mobiles sold in India.".Reference was made to a Supreme Court decision which held that when a special statute like FEMA creates a special mechanism for adjudication and provides for remedies itself, a writ petition on the subject should not be entertained..Thus, the Court held that the issue of the ED's jurisdiction to pass the seizure order ought to be decided by the Competent Authority under the Act. After noting that the seizure order was already placed before the Authority, the Court directed it to dispose of the matter not later than 60 days from the passing of this order.It was made clear that the Court's previous orders staying the ED's seizure order, on the condition that Xiaomi India would operate the seized bank accounts only for the purpose of meeting the expenses for carrying out the day to day activities of the company, would continue to operate till orders are passed by the Competent Authority..Senior Advocate Sajan Poovayya, along with Advocate Aditya Vikram Bhat (AZB Partner) appeared for Xiaomi India. Additional Solicitor General MB Nargund, along with Central Government Counsel Madhukar Deshpande, represented the Centre and the ED..[Read judgment]