Xiaomi India Liable For Differential Customs Duty On Qualcomm Royalties; Royalty Includible In Assessable Value: CESTAT Chennai:

The Bench comprising of Mr. M. Ajit Kumar (Technical Member) and Mr. P. Dinesha (Judicial Member) examined whether royalty payments were linked to imported goods and thus dutiable, concluded that “Royalties and License Fees paid by Xiaomi India are addable to the assessable value of the impugned goods as per Rule 10(1)(c) of the Customs Valuation Rules, 2007 and the differential duty is payable by Xiaomi India for the extended period”. The imported components of mobile phones were found liable for confiscation and penalties were imposed on Manufacturers like Rising Star Mobile India Private Limited, Flextronics Technologies India Private Limited and others under Section 111(m) and Section 112 of the Customs Act. However, personal penalty was set aside on CFO of Xiaomi India under Section 112(a) and 114AA of the Customs Act.

Xiaomi, an 'Electronic contract manufacturing (ECM) company' that designs, manufacture, test, distribute, and provide return/repair services for electronic components and assemblies for original equipment manufacturers (OEMs) was required to pay royalty/licence fee to Qualcomm in respect of import of components/parts used in the mobile phones under different Royalty/License Fee agreements.

The Directorate of Revenue Intelligence initiated an investigation into assessee, Xiaomi India for on non-inclusion of royalty and license fee (paid by Xiaomi India under exclusive agreements with IPR holders) to the assessable value of the goods imported.

The DRI alleged that Xiaomi India and its contract manufacturers were not including royalty and license fees paid to Qualcomm (US) and Beijing Xiaomi Mobile Software Co. Ltd. (China) in the assessable value of imported mobile phone components.

Three show cause notices (SCN) were issued along with four of its 'Contract Manufacturers' (CM) [viz. M/s. Rising Star Mobile India Private Limited, M/s. Flextronics Technologies India Private Limited, M/s. Hi-Pad Technology India Private Limited & M/s. DBG Technology India Private Limited], and others, for the period April 01, 2017 to June 30, 2020, under Section 28(4) of the Customs Act, 1962. With the appointment of a Common Adjudicating Authority, the adjudication led to redetermination of assessable value, demand of differential duty, confiscation of goods, and imposition of penalties.

The CESTAT discussed on standards applicable for determination of 'beneficial owner', addition of royalty to transaction value under the Customs Act apart from the legal reasoning pertaining to burden of proof, which is as follows.

Interpretation of agreements

CESTAT tracing through the 'Product Purchase Agreement', 'Goods Sales Agreement', 'Supply Agreement' noted that the prompt payment of license fee by Xiaomi India is a sine quo non for the supply of parts and components to the CM's. CESTAT clarifies that these are service contract being passed off as a contract for sale

'Beneficial Ownership and Tax

To comprehend the concept of 'Beneficial Ownership', CESTAT cited international and domestic literature like, Transparency – Implementation and Remaining Challenges - OECD and Global Forum Report to G20 Finance Ministers and Central Bank Governors. July 2024, Brazil, comprehensive study by Global Financial Integrity, Washington, Companies (Significant Beneficial Owners) Rules, 2018 together with a bevy of decisions of Supreme Court which have dealt with definition of an 'importer'. In this vein, CESTAT goes on to examine 'Who exercises effective control' by referring to the 'ring fencing clause' to state that “the understanding of the parties on subsequent government action on taxes, interest, penalties etc on the CM's which shifts the burden of reimbursement to Xiaomi India. Hence the parties too agree that the final resting place of these charges will be Xiaomi India, the beneficial owner.”

As opposed to the contention of assessee that CMs are independent entities not under the control of Xiaomi, CESTAT clarified that reimbursement of any unseen costs like duty, interest etc. to the CM's is upon the assessee. Thus, CESTAT held that “the rights of the Contract Manufacturers are very restricted….. Substantial control is with Xiaomi India who is the dominant party in the Agreement and there is no such right of effective possession and control that comes to vest with the CM's.”

Thus, sets aside the order on this aspect as allegation in the SCN regarding assessee being the beneficial owner

Addition of Royalty and License Fee paid by Xiaomi India

As for addition of payments under Rule 10(1) ( c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 2007,

On valuation, the CESTAT rejected the contention of assessee that although method of computation of royalty for Standard Essential Patents (SEP) was on the value of the mobile phone, but same cannot be understood to mean that the SEPs were in relation to the mobile phones as SEP are not related to any specific model of mobile phone or any specific imported component. Given that “it is for Xiaomi and others to declare the facts about the number of patents involved with the imported goods at the time of import and pay duty accordingly, as the details are within their special knowledge.”, CESTAT dismisses the plea of 'mercantile practices', 'industry norms', 'commercial convenience' approach in absence of an item-wise, stage-wise breakdown, determined the royalty based upon the price of, the handset which uses all those features.

The CESTAT interprets phrase 'in relation to' the mobile phones used in the agreements to mean that “the payments made include payment for the right to distribute or resell the imported goods”. Thus, reading the contract as a 'whole rejects the contention of assessee that royalty payment is triggered only on sale of the finished mobile phone in India, and is not a condition of sale of the imported components. CESTAT from the agreements with CMs, IPR Owners inferred that all three conditions stand satisfied viz. (i) payment actually made and not included in price paid (ii) payment as a condition of sale (iii)) tosatisfy an obligation of the seller. Further, CESTAT observed that “the point of payment of royalty is artificially created as per Agreement. The point of payment of royalty is not determinative of the payment being a post import payment…..”

Accordingly, the CESTAT held that royalty was relatable to the imported goods and is a condition of sale directly or indirectly, which must be included in the invoice value as required by Rule 10(1)(C) of the CVR, 2007

Extended period of limitation

The CESTAT noted that in the mobile industry, royalties are usually charged based on the full device and all related patents, not just specific technologies. Further, CESTAT clarifies that price of the handset is often used to calculate these payments, even though it doesn't show which technologies are used or how including royalties for the phone's parts and components to state that there has been absence of a 'full and true disclosure' of primary facts. Thus, the CESTAT held that “with intent to evade payment of duty” is not an essential condition for evoking the extended time limit under the Customs Act, 1962.

Accordingly, the CESTAT held that extended period of limitation for demand of duty was invokable in default of not declaring royalty and licence fee paid or payable by them to Qualcomm and Xiaomi Beijing.

Case Name: Xiaomi Technology India Pvt. Ltd.

Case No.: Customs Appeal No. 40085/2024

Date of Decision: 14.11.2025

Appearance: Advocates V. Lakshmi Kumaran, Anurag Kapur, Rohan Muralidharan, Shobhana Krishnan, Sameer Bhatrahalli Rao appeared for Xiaomi India and other manufacturers.

Click Here To Read/Download The Order