Ganesh, Poovayya and AZB get relief for Xiaomi from Karnataka High Court in FEMA case by ED

The Karnataka High Court on Thursday stayed an order of the Enforcement Directorate (ED) seizing the bank accounts of Chinese technology company Xiaomi [Xiaomi Technology India Pvt Ltd v. Union of India]..Justice Hemant Chandanagoudar held after hearing counsel for the company,"Operation of the order dated 29.4.2022 passed by the 2nd respondent at Annexure-A is stayed till the next date of hearing subject to the condition that the petitioner shall operate the Bank accounts which are seized under the impugned order only for the purpose of meeting the expenses for carrying out the day to day activities...".The Court made it clear that its interim order would not confer any right on Xiaomi to make payment in the form of royalty or any other form to companies located outside India..Counsel for Xiaomi contended that the technology royalty payments made by the company to three foreign companies situated outside India were not in contravention of Section 4 of the Foreign Exchange Management Act (FEMA). Further, the payments had been considered lawful by the Income Tax Department, which treated them as deductions.Technology royalty payments were made by the company from 2015-16 till date through authorised dealers, and there was no evidence to show that Xiaomi was possessing foreign exchange outside India. Thus, the order passed by the ED using its powers under Section 37A of the FEMA was unsustainable, it was argued..The seizure of the bank accounts by the ED was disrupting the business of the company and was preventing it from paying salaries and wages to its employees, the Court was told.Another point raised was that the company was constrained to approach the High Court since the Appellate Tribunal under the Act was not functional owing to a lack of personnel..The Court eventually issued notice in the matter and stayed the seizure of the company's assets. It noted in its order,"The interim prayer for permission to make payments to foreign companies located outside India requires to be considered only after hearing the respondents. Liberty is reserved with the respondents to seek for vacation/modification of this interim order.".The matter will be heard next on May 12..Senior Advocates S Ganesh and Sajan Poovayya briefed by a team from AZB & Partners headed by Partner Aditya Vikram Bhat, appeared for Xiaomi.