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

The Chennai Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held Xiaomi India liable for differential customs duties on royalties to Qualcomm and Beijing Xiaomi Mobile Software under various agreements for importing and selling Xiaomi-branded mobile phones and components 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 ...

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

Parul Bose

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