CESTAT Chennai Upholds Customs Duty Demand Against Xiaomi for Undisclosed Royalty & Licence Fee Payments
Pranav B Prem
The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai, comprising P. Dinesha (Judicial Member) and M. Ajit Kumar (Technical Member), has upheld major customs duty demands against Xiaomi Technology India Pvt. Ltd., holding that the company engaged in customs duty evasion by failing to disclose royalty and licence fee payments that were mandatorily includable in the assessable value of imported mobile phones and components.
The ruling follows an extensive investigation conducted by the Directorate of Revenue Intelligence (DRI) into Xiaomi’s valuation practices and its arrangements with several contract manufacturers, including Rising Star (Bharat FIH), Hi-Pad, Flextronics, DBG Technology, and Sameer Bhatrahalli Rao. The DRI discovered that Xiaomi had entered into multiple technology and licensing agreements—such as SULA, MPLA, MSA, and LRAA—with Qualcomm Inc. and Beijing Xiaomi, under which it paid substantial royalties linked directly to the technologies used in its phones, including 2G/3G/4G and multimode communication systems.
The Tribunal noted that Xiaomi India began paying royalties to Qualcomm from FY 2015–16 and licence fees to Beijing Xiaomi from FY 2017–18, but failed to disclose these payments before the Special Valuation Branch (SVB), Bengaluru, or in any Bills of Entry filed by itself or its contract manufacturers. The omission was significant because these payments were directly related to the imported goods and were therefore required to be added to the transaction value under Section 14 of the Customs Act, 1962, read with Rule 10 of the Customs Valuation Rules, 2007.
A critical finding of the Tribunal was that the imported mobile phone components were unusable without the licensed technology, making the royalty payments an unavoidable condition for manufacturing and selling phones in India. The royalty agreements constituted a whole-portfolio device licence, and the intellectual property was inseparable from the functioning of the imported goods. Accordingly, the bench held that these payments were squarely includable under Rule 10(1)(c), which covers royalties and licence fees related to imported goods as a condition of sale.
The CESTAT affirmed the department’s stand that Xiaomi India and its partners had engaged in deliberate suppression, justifying the invocation of the extended period of limitation and rendering the goods liable for confiscation under Section 111(m) for mis-declaration of value.
However, the Tribunal granted partial relief on the issue of IGST. Since Section 3(12) of the Customs Tariff Act—allowing interest recovery on IGST—was amended only from 16 August 2024, the Tribunal held that no interest, penalty, or redemption fine could be imposed in relation to IGST short-payment for earlier periods.
Xiaomi argued that customs duty could not be demanded from it because the Bills of Entry were filed by its contract manufacturers. But the bench rejected this contention, holding that Xiaomi exercised complete control over design, manufacturing, supply chain, licensing, pricing, and intellectual property, making it the “beneficial owner” under the expanded definition introduced in 2017. As the beneficial owner, Xiaomi was fully accountable for proper disclosure of all royalty-linked payments. In conclusion, the Tribunal upheld the customs duty demands and interest (except IGST-related interest prior to August 2024), confirming that Xiaomi India’s non-disclosure of royalty and licence fee obligations amounted to customs duty evasion.
Appearance
Counsel For Petitioner: Lakshmi Kumaran V, Advocate
Counsel For Respondent: P.R.V. Ramanan, Special Counsel
Cause Title: M/s. Xiaomi Technology India Pvt. Ltd. Versus Principal Commissioner of Customs
Case No: Customs Appeal No. 40085/2024
Coram: P. Dinesha (Judicial Member), M. Ajit Kumar (Technical Member)
