Chinese smartphone maker Xiaomi has challenged an Indian tax tribunal ruling that accused the company of evading $72 million in customs duties. The dispute centers on royalty payments linked to imported smartphone components. Legal experts say the case could shape India’s approach to contract manufacturing.
Xiaomi has been a major player in India’s smartphone market for years. The company relies on local contract manufacturers to import parts from China, pay customs duties, and assemble devices in India. However, in November, an Indian tax tribunal ruled that the declared import values were undervalued for at least three years before 2020.
According to the tribunal, the import values did not include royalty payments ranging from 2% to 5%. These royalties were paid by Xiaomi to foreign technology firms such as Qualcomm. The tribunal said those payments should have been added to the import value and taxed accordingly.
In its appeal to the Supreme Court, Xiaomi argued that the tribunal made a legal error. The company stated that it was wrongly labeled as the “beneficial owner” of the imported components while also being required to pay tax on royalties. Xiaomi has asked the court to overturn the decision.
Legal analysts believe the outcome could set an important precedent. If the ruling stands, customs authorities may gain broader powers to tax royalty payments tied to imported goods. This could impact several sectors, including pharmaceuticals, automobiles, and electronics manufacturing.
Xiaomi’s former contract manufacturers, including units of Flex and Foxconn, are also challenging the ruling. Lawyers say the Supreme Court’s decision will clarify how royalty agreements are treated under Indian customs law.
The financial impact could be significant. Under Indian law, the original $72 million demand could exceed $150 million after interest and penalties. This would be substantial, considering Xiaomi India reported profits of $31.7 million in the 2023-2024 financial year.
In addition, about $610 million of Xiaomi India’s bank funds have been frozen since 2022 due to separate allegations of illegal remittances. The company has denied any wrongdoing.
Market data also shows Xiaomi’s smartphone market share in India has declined sharply in recent years. The case comes at a time when India is actively encouraging foreign firms to expand local manufacturing.
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The Supreme Court has asked the Indian government to respond to Xiaomi’s plea. The final decision is expected to have wide implications for global investors and companies operating under India’s contract manufacturing framework.
