Xiaomi Moves SC Against $72 Mn Tax Ruling, Calls Tribunal Ruling a Risk

Chinese multinational technology company Xiaomi has challenged an Indian tax ruling that said the company evaded $72mn in tariffs on royalty payments, Reuters reported.

This is as per court filings, a dispute that the firm and its legal team describe as a crucial test of the country’s legal system for contract manufacturing.

Xiaomi has long relied on local contract manufacturers who import components from China, pay the applicable customs duties and then assemble the finished devices.

However, in November, an Indian tax tribunal ruled that these import prices had been undervalued for at least three years up to 2020 because they did not factor in the 2%–5% royalties Xiaomi pays to foreign technology firms — including Qualcomm — for the use of their patented technologies in those components.

In its petition before the Supreme Court of India, Xiaomi has argued that the tax tribunal was wrong to classify the company as the “beneficial owner” of the imported components while simultaneously directing it to pay tax on the associated royalties. The company is seeking to have the decision set aside.

Xiaomi warned in a 15 January court filing, reviewed by Reuters, that the ruling carries broad implications, suggesting “an implicit mistrust of the entire contract manufacturing industry.”

The report added that as per Indian law, the customs tax demand of $72mn could rise to more than $150mn with interest and penalties if Xiaomi India loses in court. It could dent the firm's financials as its profits were only at $31.7mn in the FY24.

Xiaomi’s former contract manufacturers — Flextronics Technologies India, part of the US-listed Flex, and Bharat FIH, a subsidiary of Taiwan’s Foxconn — are also challenging the tax tribunal’s ruling in the Supreme Court of India, according to two people familiar with the case and the court’s online records.

Tax specialists say the proceedings are being closely followed by global investors and multinational firms that have made significant bets on India’s manufacturing push.