Based upon an intelligence that M/s Xiaomi Technology India Private Limited (Xiaomi India) was evading customs duty by way of undervaluation, an investigation was initiated by the Directorate of Revenue Intelligence (DRI) against Xiaomi India and its contract manufacturers. During the investigation, searches were conducted by the DRI at the premises of Xiaomi India, which led to the recovery of incriminating documents indicating that Xiaomi India was remitting royalty and licence fee to Qualcomm USA and to Beijing Xiaomi Mobile Software Co. Ltd., under contractual obligation. Statements of key persons of Xiaomi India and its contract manufactures were recorded, during which one of the directors of Xiaomi India confirmed the said payments.

During the investigations, it further emerged that the “royalty and licence fee” paid by Xiaomi India to Qualcomm USA and to Beijing Xiaomi Mobile Software Co. Ltd., China (related party of Xiaomi India) were not being added in the transaction value of the goods imported by Xiaomi India and its contract manufacturers.

The investigations conducted by the DRI further showed that Xiaomi India is engaged in the sale of MI brand mobile phones and these mobile phones are either imported by Xiaomi India or assembled in India by importing parts and components of mobile phones by contract manufacturers of Xiaomi India. The MI brand mobile phones manufactured by the contract manufacturers are sold exclusively to Xiaomi India, in terms of the contract agreement.

Evidence gathered during the investigations by the DRI indicated that neither Xiaomi India nor its contract manufactures were including the amount of royalty paid by Xiaomi India in the assessable value of the goods imported by Xiaomi India and its contract manufacturers, which is in violation of Section 14 of the Customs Act, 1962 and Customs valuation (determination of value of imported goods) Rules 2007. By not adding “royalty and licence fee” into the transaction value, Xiaomi India was evading Customs duty being the beneficial owner of such imported mobile phones, the parts and components thereof.

After completion of the investigation by the DRI, three show cause notices have been issued to M/s Xiaomi Technology India Private Limited for demand and recovery of duty amounting to ₹ 653 crore for the period 01.04.2017 to 30.06.2020, under the provisions of the Customs Act, 1962.

Customs undervaluation: undisclosed royalties excluded from transaction value trigger duty recovery action. Alleged omission of royalty and licence fee payments from declared transaction value resulted in undervaluation of imported mobile phones, parts and components; documentary evidence and statements indicate such payments were contractual but not added to assessable value, invoking Section 14 and Customs Valuation Rules and leading to show cause notices seeking duty recovery for the investigation period.