TaxTMI 
TaxTMI 
2025 (7) TMI 285
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....e FEMA) to the first respondent, (ii) the show cause notice dated 09.6.2023 issued by the first respondent under Rule 4(1) of the Foreign Exchange Management (Adjudication Proceedings and Appeal) Rules, 2000 (for brevity, the FEMA Rules), (iii) the opinion formed by the first respondent under Rule 4(3) of the FEMA Rules, (iv) the act of proceeding further with the inquiry by informing the petitioners about the contraventions of the provisions of the FEMA, the FEMA Rules and the Regulations, etc., under Rule 4(4) of the FEMA Rules and (v) the denial of inspection of the entire original record of investigation including the unrelied documents and (vi) for a direction to provide the certified copies of the same. 2. Heard the learned Senior Counsel appearing on behalf of the petitioners and the learned Additional Solicitor General assisted by the Special Public Prosecutor appearing for the respondents. FACTS : 3. The case of the petitioners is as follows : (i) The petitioner company is engaged, inter alia, in the business of procurement, supply and distribution of Xiaomi branded products in India. It was incorporated on 07.10.2014 as a subsidiary of (a) M/s.Xiaomi Singapore PTE Li....
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....issued by the first respondent, it has been alleged that the petitioners contravened the provisions of Section 3(b) of the FEMA by transferring the funds indirectly to one M/s.Xiaomi Communications Co. Ltd. and also contravened the provisions of Section 4 of the FEMA by acquiring and transferring the foreign exchange to their entities outside India. (vii) The petitioners allege that though they made a request for inspection of the entire records of investigation, based on which, the complaint was given by the second respondent, the said request was rejected. A notice of hearing dated 11.9.2023 was received by the petitioners from the first respondent stating that they formed an opinion that an inquiry should be held in this case in terms of Rule 4(3) of the FEMA Rules and fixed the date of personal hearing on 06.10.2023. (viii) On receipt of the notice of hearing, the petitioners submitted the preliminary objections in terms of Rule 4 of the FEMA Rules and also sought for recalling the notice dated 11.9.2023. Arguments were heard by the first respondent and by order dated 24.11.2023, the review petition was dismissed as not maintainable. (ix) Earlier, the petitioner company f....
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....said common order since the learned Single Judge, after having found that the documents were supplied to the petitioners subsequently after the issuance of the notice under Rule 4(3) of the FEMA Rules, sustained the opinion arrived by the first respondent and directed him to provide an opportunity to the petitioners and form a further opinion. (xi) As against the said common order dated 23.1.2024 rendered in W.P.Nos.35660, 35662, 35664 & 35668 of 2023, the petitioners filed W.A.Nos.588 to 591 of 2024, in which, the First Bench of this Court delivered a common judgment on 22.2.2024 in the following terms : "6. In view of the fact that the learned Single Judge has observed that the principles of natural justice are violated in view of the fact that the documents were not supplied to the appellant, though was given an opportunity to inspect and directed to give an opportunity to the appellant to file its explanation in view of the four documents supplied later on, naturally the opinion to be formed would be based on the explanation given by the appellant upon the supply of all the documents. As such, instead of further opinion to be formed by the officer, the adjudicating authorit....
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....o drag on the proceedings. Ultimately, the second respondent sought for dismissal of these writ petitions. 5. The learned Senior Counsel appearing on behalf of the petitioners made the following submissions : (a) The corporate structure of the Xiaomi Group is as follows : (b) The SULA dated 27.10.2010 was entered into between the said M/s.Qualcomm Incorporated (a Delaware Corporation) and one M/s.Xiaomi Inc. (a company organized under the laws of the People's Republic of China) so as to enable the said M/s.Xiaomi Inc. to obtain a licence of M/s.Qualcomm Intellectural Property to manufacture and sell the subscriber units in exchange for the licence fees and royalties. The definition of the word "affiliates" is provided under the SULA and the petitioner company will directly fall under this definition since it comes within the same Xiaomi Group and is an indirect subsidiary. (c) He pointed out to the assignment and amendment of the SULA dated 16.10.2023 entered into among the said M/s.Qualcomm Incorporated, one M/s.Xiaomi Technology Co.Ltd., the said M/s.Xiaomi Communications Co.Ltd. and one M/s.Xiaomi Corporation. By virtue of this agreement, the said M/s.Qualcomm Incorpo....
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.... Agreement dated 01.8.2016 entered into among the said M/s.Qualcomm Technologies Inc., the said M/s.Xiaomi Communications Co.Ltd. and the petitioner company. (i) The further royalty of Rs. 223.73 Crores was paid to the said M/s.Qualcomm Technologies Inc., in this regard. Apart from that, there is an agreement called as the LRAA dated 01.12.2017 entered into between the said M/s.Beijing Xiaomi Mobile Software Company Limited and the petitioner company and towards the same, the petitioners paid a sum of Rs. 877.31 Crores. (j) In the light of the above submissions, the learned Senior Counsel questioned the very complaint given by the second respondent under Section 16(3) of the FEMA, the show cause notice that was issued under Rule 4(1) of the FEMA Rules and also the opinion formed by the first respondent under Rule 4(3) of the FEMA Rules. (k) The petitioners made repeated requests for the inspection of records of investigation and access to the relied upon documents (RUDs). The first respondent, without supplying the RUDs, proceeded to form an ex parte opinion under Rule 4(3) of the FEMA Rules. On 07.10.2024, the petitioners filed three applications before the first respondent ....
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....ity as to the actual contravention made since the second respondent was not sure of the allegations being made against the petitioners and conducted the investigation in haste. ● It is not the prerogative of the second respondent to determine the validity of the contracts or make assertions regarding the non payment of taxes and both of them are not the subject matters within the jurisdiction of the second respondent under the FEMA. In short, the second respondent is incompetent to adjudicate or opine on the contractual rights under the Patent Law. The Authority does not have the domain to re-write the agreements, which have been entered into by the petitioner company with the other parties on the basis of commercial expediencies. ● The second respondent failed to see that the mobile phones sold by the petitioner company use SEPs/technology of the Qualcomm Entities and the said M/s.Beijing Xiaomi Mobile Software Company Limited. The petitioners made payments towards royalty and there is no complaint of any double payment of royalty. The royalty charged from the petitioners is on FRAND and is not excessive. Such payments were made through the authorized dealers and t....
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....olation of the principles of natural justice. To substantiate this submission, reliance is placed upon the First Bench judgment of the Bombay High Court in the case of Shashank Vyankatesh Manohar Vs. Union of India [reported in 2013 SCC OnLine Bombay 987 : 2014 (1) Maharashtra LJ 838]. ● The burden of proof to demonstrate the contravention under the FEMA is on the second respondent. However, this burden has not been discharged by the second respondent. Since this onus has not been satisfied, the very complaint itself is bad in law and Section 42 of the FEMA is not satisfied in so far as the proceedings against the Executive of the company is concerned. ● The proceedings initiated by the second respondent is vitiated by bias since he is under a pre-conceived notion that the petitioners have contravened the provisions of the FEMA only based on his interpretation and understanding of the various agreements entered into by the petitioner company with the other parties. ● The petitioners have the right to inspect the entire record of investigation in order to assess both the inculpatory and exculpatory documents whereas the second respondent has cherry picked sel....
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....o commence and that will start only after forming an opinion under Rule 4(3) of the FEMA Rules. At that stage, the Adjudicating Authority is required to given an opportunity to such a person to produce such documents as evidence as he may consider relevant to the inquiry. It is only at that stage, the disclosure of the reports and the evidence that are in possession of the Department will have to be furnished so as to enable the petitioners to effectively defend themselves. Without even reaching that stage, the petitioners cannot be allowed to make the submissions on merits and make this Court adorn the role of the Adjudicating Authority. ● The petitioners have sufficient alternative remedies in terms of a right of appeal under Section 19(1) of the FEMA and a further appeal is provided under Section 35 of the FEMA before this Court on questions of law. Thus, the Legislature itself has brought the High Court into the scene only at the stage of further appeal whereas the petitioners want this Court to enter the scene even at the stage of formation of opinion under Rule 4(3) of the FEMA Rules. ● It is the defence taken by the petitioners that Section 5 of the FEMA will....
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....ngs under the FEMA where the language used under Rule 4(3) of the FEMA Rules does not contemplate assignment of reasons while forming the opinion. ● In so far as the documents sought for by the petitioners were concerned, that stage has not yet reached and while forming the opinion, the first respondent applies his mind only to those documents that have been relied upon by the second respondent and the copies of those documents are available with the petitioners. The question of calling for the non RUDs will arise only at the stage of defence. ● Reliance is also placed on a common judgment of the Three Judges' Bench of the Hon'ble Apex Court in the case of Sarla Gupta Vs. Directorate of Enforcement [Criminal Appeal Nos.1622 of 2022 & 730 of 2024 dated 07.5.2025]. ● The materials that have been collected prima facie reflected that the petitioners made huge payments on behalf of the entities outside India. That apart, the petitioners were not willing to share the accounts and kept them as a secret, which is evident from the statements recorded from the officers belonging to the authorized dealers. 8. In reply to the above submissions, the learned Seni....
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....11. The petitioners have assailed different stages of the adjudication proceedings through a series of writ petitions filed before this Court, specifically: (i) the complaint dated 02.6.2023 filed by the second respondent has been challenged in W.P.Nos.16000 and 16002 of 2024; (ii) the notice of hearing dated 04.4.2024 and the formation of opinion by the first respondent under Rule 4(3) of the FEMA Rules have been challenged in W.P.Nos.15996 and 15998 of 2024; (iii) the show cause notice dated 09.6.2023 issued by the first respondent has been challenged in W.P.Nos.15999 and 16001 of 2024; and (iv) the order dated 10.2.2025 rejecting the petitioners' request for full disclosure of the records has been challenged in W.P.Nos.6948 and 7290 of 2025. 12. The petitioner company viz. M/s.Xiaomi Technology India Private Limited is a private limited company incorporated on 07.10.2014 under the Companies Act, 2013 with its registered office at Bengaluru, Karnataka State, India. It carries on the business of procurement, distribution and sale of Xiaomi-branded products within the Indian market. The petitioner company is a wholly-owned subsidiary of the said M/s.Xiaomi Singapore PT....
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....a transfer of the contractual relationship to the said M/s.Qualcomm Technologies Inc. 17. Subsequently, the rights under the SULA were further assigned by the said Xiaomi Technology Co.Ltd. to the said M/s.Xiaomi Communications Co.Ltd. through an Assignment and Amendment Agreement dated 16.10.2013. The said agreement was executed among the said M/s.Qualcomm Incorporated, the said M/s.Xiaomi Technology Co. Ltd., the said M/s.Xiaomi Communications Co.Ltd. and the said M/s.Xiaomi Corporation. Through this agreement, the said M/s.Xiaomi Corporation was recognised as the parent entity of the said M/s.Xiaomi Communications Co.Ltd. and its shareholders. 18. On 13.12.2013, a further Assignment and Assumption Agreement was executed among the said M/s.Qualcomm Technologies Inc., one M/s.Qualcomm CDMA Technologies Asia-Pacific Pte Ltd and one M/s.Qualcomm Innovation Center Inc., which were collectively called as M/s.Qualcomm along with the said M/s.Beijing Xiaomi Mobile Software Company Limited and the said M/s.Xiaomi Communications Co.Ltd. Under this agreement, the contractual rights held by the said M/s.Beijing Xiaomi Technology Company Limited were formally assigned to the said M/s.Xiaom....
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....ding the petitioner company in respect of certain covered products. It was subsequently amended on 01.3.2019 to include branded CDMA and LTE single-mode complete terminals and further amended on 01.4.2020 to incorporate new definitions. (e) It is also relevant to note that by way of a communication dated 18.5.2018, the said M/s.Qualcomm Incorporated expressly instructed the petitioner company to directly remit the royalty payments on behalf of the said M/s.Xiaomi Communications Co.Ltd. due under the SULA framework to them. This appears to be the only contemporaneous document on record wherein such an instruction was formally issued to the petitioner company. Category II - Payments to the said M/s.Beijing Xiaomi Mobile Software Company Limited : 22. (a) The second category of royalty payments pertains to the amounts remitted by the petitioner company to the said M/s.Beijing Xiaomi Mobile Software Company Limited under the LRAA dated 01.12.2017, which was stated to have been given effect from 01.4.2017. Under the said agreement, the said M/s.Beijing Xiaomi Mobile Software Company Limited granted a license to its affiliates, including the petitioner company to utilise the propriet....
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....cause on or before 09.7.2023 as to: I. why an inquiry should not be held under the FEMA Rules; II. why penalty under Section 13(1) of THE FEMA should not be imposed; and III. why the seized amount should not be confiscated under Section 13(1-A) of the FEMA. 26. The petitioners received the copies of the complaint, the show cause notice and the set of RUDs on 15.6.2023. It is the case of the petitioners that several documents referred to in the complaint were not furnished and that various materials submitted by the petitioners during the course of the investigation were neither included in the RUDs nor considered in the formation of the opinion against the petitioners. Between June and September 2023, the petitioners were stated to have made multiple representations seeking for inspection and for the issuance of certified copies of the entire record of investigation, including the non-RUDs. A request was also made for a personal hearing to explain the relevance and necessity of the documents sought for. 27. While the request of the petitioners for inspection and disclosure is still pending, the first respondent, by order dated 11.9.2023, proceeded to form an opinion under R....
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....ns or basis for the decision. 31. By letter dated 20.4.2024, the petitioners sent a reply to the first respondent through an advocate seeking a copy of the formal order recording the opinion along with reasons after making a reference to Technical Circular No.11/2014. The first respondent, vide email dated 25.4.2024, responded stating that the opinion had been completed and formed part of the note sheet of adjudication. 32. During the personal hearing held on 07.10.2024, the petitioners reiterated their request for inspection of the entire record of investigation and for the issuance of certified copies of the complete case records, including documents not forming part of the RUDs. The first respondent is stated to have directed the second respondent to facilitate inspection. However, during the inspection conducted on 16.10.2024, the petitioner's representatives found that the case record made available was substantially incomplete. Despite issuance of repeated follow-up letters, full disclosure of the documents sought for including the certified copies was not furnished by the respondents. 33. Ultimately, on 10.2.2025, the first respondent rejected the petitioners' req....
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....ollow the prescribed procedure under the statute and the Rules and is not free and entitled to devise its own procedure for making inquiry while adjudicating under Section 13 of the Act since it is under legislative mandate to undertake adjudication and hold inquiry in the prescribed manner after giving the person alleged to have committed contravention against whom a complaint has been made, a reasonable opportunity of being heard for the purpose of imposing any penalty. The discretion of the Authority is so well structured by the statute and the Rules. 23. The Rules do not provide and empower the Adjudicating Authority to straight away make any inquiry into allegations of contravention against any person against whom a complaint has been received by it. Rule 4 of the Rules mandates that for the purpose of adjudication whether any person has committed any contravention, the Adjudicating Authority shall issue a notice to such person requiring him to show cause as to why an inquiry should not be held against him. It is clear from a bare reading of the rule that show cause notice to be so issued is not for the purposes of making any adjudication into alleged contravention but only ....
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....iry should be held, a notice fixing a date for appearance of that person, either personally or through lawyer or authorised chartered accountant, be issued. 107. While interpreting of the provisions of Rule 4(1) and 4(3) of the FEMA Rules, 2000, the Supreme Court in Natwar Singh v. Directorate of Enforcement, [(2010) 13 SCC 255] arrived at its conclusion in paragraph 23 of its judgment that the Rules do not provide and empower the adjudicating officer to straight away make an enquiry into the allegations of contravention in respect of any person, against whom a complaint had been received. The Supreme Court was of the view that for the purpose of adjudication whether any person has committed any contravention, the adjudicating officer shall issue notice requiring him to show cause as to why an enquiry should not be held and the notice to be issued is not for the purposes of making any adjudication into the alleged contravention, but only for the purpose of deciding whether an enquiry should be held. After taking the cause shown by such person the adjudicating officer is required to form an opinion as to whether any enquiry is required to be held and it is only then the real and s....
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....s of contravention." 39. The above judgment lucidly explains the scope of inquiry into the allegations of contravention against any person, against whom, a complaint has been received, at every stage, till an opinion is formed under Rule 4(3) of the FEMA Rules. The stage under Rule 4(1) of the FEMA Rules is structured only for deciding as to whether an inquiry must be conducted. This is not the stage for the purpose of making an adjudication into the alleged contravention and that stage is reached subsequently while forming an opinion under Rule 4(3) of the FEMA Rules. 40. The above said proposition of law was considered elaborately by the Hon'ble Apex Court in the case of T.Takano Vs. SEBI [reported in 2022 SCC OnLine SC 210]. 41. At the stage of Rule 4(1) of the FEMA Rules, the Authority cannot embark into the actual adjudication being made, which ultimately results in imposition of penalties prescribed under the FEMA. Thus, broadly, three stages of inquiry can be deduced from Rule 4 of the FEMA Rules. The first stage under Rule 4(1) of the FEMA Rules is for the purpose of finding out as to whether an inquiry should be held and the Authority will not embark into an actual ....
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....y the first respondent under Rule 4(3) of the FEMA Rules. 46. In the first round, the petitioner company filed W.P.Nos. 35654 of 2023 etc. cases questioning the show cause notice issued under Rule 4(1) of the FEMA Rules and also the opinion formed under Rule 4(3) of the FEMA Rules. When the earlier writ petitions were disposed of on 23.1.2024 by a common order, this Court did not go into the legality of the show cause notice issued under Rule 4(1) of the FEMA Rules. Only in so far as the formation of opinion is concerned, this Court directed the first respondent to come up with the further opinion based on the further documents relied upon by the petitioner company. At the instance of the petitioner company, the First Bench of this Court, in the writ appeals filed against the said common order dated 23.1.2024 in W.A.Nos.588 to 591 of 2024, W.A.Nos.756 of 2024 and W.A.Nos.785 to 787 of 2024 vide separate judgments dated 22.2.2024, 05.3.2024 and 08.3.2024 respectively, did not go into the legality of the show cause notice and they confined themselves only to the stage of formation of opinion under Rule 4(3) of the FEMA Rules, set aside the common order dated 23.1.2024 passed by the ....
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....ules or the Regulations. 4. Giving of an opportunity to the noticee to produce such documents or evidence and the summoning and enforcing of the attendance of any person. 5. Passing of the orders.' 10. Therefore, the scheme of Section 4 actually provides opportunities at the every stage to the noticee. The forming of an opinion at the stage of show cause notice and receipt of reply, as provided in Sub-Rule (3) of Rule 4, is almost akin to the forming of an opinion by a disciplinary authority to hold or not an enquiry, upon receipt of a reply to a charge memo in a disciplinary proceeding. Therefore, I do not think that there is any scope for expanding Rule 4(3) to mean that the forming of the opinion as required in Rule 4(3) has to be reflected by an order in writing containing reasons. The interpretation given by the Division Bench of the Bombay High Court to the expression opinion appears to be very elastic. 11. Be that as it may, the petitioner had allowed several things to pass before he came up with the above writ petition. When the petitioner came up with the above writ petition, the stage of Rule 4(3) had already been passed. The enquiry had actually come, at the ....
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....ingle Judge of this Court (S.M.Subramaniam,J) in the case of Citi Bank N.A. Vs. Directorate of Enforcement [W.P.No.374 of 2024 dated 30.4.2024]. The said case arose out of a challenge to the formation of opinion under Rule 4(3) of the FEMA Rules. While dealing with the same, the learned Single Judge took into account the above two decisions of this Court and held as follows : "16. Let us examine the spirit and intent of Rule 4(3). On issuance of show cause notice by the adjudicating authority along with the materials relating to contraventions and on receipt of the explanations from the persons/addressee, the adjudicating authority under Rule 4(3) has to consider the cause if any shown by such person. That would indicate that the explanation submitted is to be considered. On such consideration, if the adjudicating authority is of an opinion that an enquiry should be held, then he shall issue notice. Therefore, the opinion under Rule 4(3) is to be construed as personal satisfaction of the authority to proceed further and such personal opinion formed by the adjudicating authority must be recorded in the file so as to ensure that further proceedings are not continued without conside....
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....directions or orders or any condition subject to which an authorisation is issued by the Reserve Bank of India in respect of which contravention is alleged to have taken place." Therefore, the adjudicating authority is duty bound to explain to the person proceeded against or his legal practitioners about the contraventions alleged to have been committed. Communicating the formation of opinion and the reasons will be informed to the person or his legal representative by the adjudicating authority under Rule 4(4) of the Rule. On receipt of such materials from the adjudicating authority on the hearing date the person concerned is at liberty to defend his/her case by following the procedures as contemplated under Rule 4(5) to 4(12) of the Rules. 20. When Rule 4(4) unambiguously contemplates that the reason for proceeding with the adjudication must be informed to the persons or to the legal practitioners or to the Chartered Accountants and the such information should be provided along with the allegations and the provisions of the Act and Rules. The said Rules contemplates providing of information to the persons and therefore, Rule 4(3) cannot be construed as violating the Rules of Na....
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....nt Directorate has to issue suitable orders cancelling the circular." 53. A combined reading of the above three decisions of this Court on the scope of challenging an opinion arrived at under Rule 4(3) of the FEMA Rules is consistent and hence, it will be a binding precedent for this Court while dealing with the same issue in these writ petitions. 54. This Court, in no uncertain terms, held that the provisions of Sub-Rules (3) and (4) of Rule 4 of the FEMA Rules do not require reasons to be recorded in writing for forming an opinion. The only consequence that falls out of the decisions of this Court is that such forming of opinion under Rule 4(3) of the FEMA Rules is the starting stage for proceeding further with the adjudication and that the reason that impelled the Adjudicating Authority to form such an opinion cannot be a subject matter of challenge in a writ petition. All the above three decisions of this Court took note of the First Bench judgment of the Bombay High Court in the case of Shashank Vyankatesh Manohar. 55. The First Bench of the Bombay High Court, in the case of Shashank Vyankatesh Manohar, held as follows : "21. Thus, in view of the above discussion, we are ....
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....be issued. On carefully reading this circular, it is seen that a decision was taken by the Directorate of Enforcement to comply with the First Bench judgment of the Bombay High Court. It is in compliance of this circular, in the instant case, the first respondent assigned reasons while forming an opinion and the same were also furnished to the petitioners. 58. The learned Single Judge of this Court (S.M.Subramaniam,J), in the order dated 30.4.2024 passed in W.P.No.374 of 2024, directed the Enforcement Directorate to cancel the circular as lapsed in view of the judgment of the Division Bench of this Court taking a contrary view from the First Bench judgment of the Bombay High Court in the case of Shashank Vyankatesh Manohar. It is not necessary for this Court to go into the controversy as to whether such a direction could have been issued to the Enforcement Directorate to cancel the circular only on the ground that the Division Bench of this Court had taken a contrary view from the First Bench judgment of the Bombay High Court as confirmed by the Hon'ble Apex Court. 59. The Enactment in question is a Central Enactment and as on date, there are conflicting views of two High Cou....
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.... out of which, nearly Rs. 877 Crores went into the account of one of the companies that formed part of the Xiaomi Group and the first respondent has formed an opinion that such payments were made without getting prior approval under Section 3 of the FEMA and that such huge payments were made on behalf of the entities operating outside India, which formed part of the Xiaomi Group; and (ii) The other issue is regarding the statements made by the officers belonging to the authorized dealers stating that the petitioners were not willing to share the books of accounts and they were kept secret. 64. It is not necessary for this Court to go deep into the reasons arrived at by the first respondent while forming an opinion. This Court only wanted to satisfy itself as to whether the first respondent had applied his mind and formed an opinion. Prima facie, there is application of mind on the part of the first respondent and at that stage, since it is the commencement of the proceedings towards actual adjudication, even a strong suspicion is enough to form an opinion. To understand it from the stand point of view of Criminal Jurisprudence, it is more in the nature of taking cognizance of a ....
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....ered the defence stage till the proceedings reach the stage under Rule 4(4) of the FEMA Rules. 69. All the judgments pointed out by the learned Senior Counsel appearing on behalf of the petitioners including the judgments of the Hon'ble Apex Court in Manish Sisodia and Sarla Gupta talk about the stage, at which, even the documents, which are not relied upon, must be furnished to the accused person. This is because of the reason that there may be exculpatory materials, which are in favour of the accused persons and the same will enable the accused persons to defend themselves in the case effectively. In none of the judgments, there is insistence for furnishing of the documents, even those, which were not relied upon at the stage under Section 207 of the Criminal Procedure Code. Hence, the petitioners have the right of receiving even those materials, which were not relied upon, but not at the stage of forming an opinion and they will reach that stage only after they receive the notice of hearing and they are heard by the first respondent in the proceedings under the FEMA. That is where the noticee enters upon the defence. 70. On 07.10.2024, the petitioners filed three applicati....