TaxTMI 
TaxTMI 
2025 (11) TMI 1120
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....IT KUMAR: All these appeals arise out of a common Order in Original (OIO) and hence they were heard for common disposal. 2. Brief facts of the case are that intelligence gathered by the officers of the Delhi Zonal Unit of the Directorate of Revenue Intelligence, (DRI) indicated that M/s. Xiaomi Technology India Pvt. Ltd. (Xiaomi India) based at Bengaluru was allegedly evading customs duty by way of non-inclusion of royalty and license fee (paid by Xiaomi India under exclusive agreements with IPR holders) to the assessable value of the goods imported. Based on the investigation it appeared that Xiaomi India had paid royalty and license fee under the provisions of the agreements entered into between the parties and this fact was not disclosed by Xiaomi India to the Customs department. Royalty and license fee is includible in the transaction value as per sec. 14 of the Customs Act, 1962 (Customs Act) read with Rule 10 of the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (Valuation Rules), and Explanation to Rule 10(1)(c) and (e). (The terms "royalty" and "licence fee" is not being differentiated from each other while examining this issue, as has also b....
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....ourt had an occasion to examine a similar situation. In Chief Commissioner of Central Goods and Service Tax & Ors. Vs M/s Safari Retreats Private Ltd. & Ors. [CIVIL APPEAL NO. 2948 OF 2023, Dated: 03/10/2024 / 2024-TIOL-101-SC-GST], The Hon'ble Court held: "Very detailed submissions have been made by the parties. We find that the submissions made by the learned counsel for the assessees and the intervenors are repetitive. There are a large number of decisions relied upon, whether relevant or irrelevant. Brevity is the hallmark of good advocacy. It would be ideal if parties on one side file joint written submissions. The Judges and lawyers are humans. Sometimes, bulky compilations and submissions can be counterproductive." The submissions made shall be stated and discussed under the relevant topics of discussion. 4. Before taking up the issues raised by the rival parties, it may be relevant to look at the business backdrop leading to such disputes. Business backdrop 5. Modern business entities view the world as a unified economic space, with Multi-National Corporations (MNCs) offering highly differentiated, often technology-driven products or services. The value....
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...., facilitating international trade, entering into business ventures with investors, establishing domestic corporate residence, and avoiding tax liability." Hence tax officials have often scrutinized contracts, involving sale to group companies/ persons, or transfer of patents/ Intellectual Property Rights (IPR) to subsidiaries, sister companies etc. in low-tax countries, which then levy royalties to its parent organization and affiliates, ['parent' paying royalty to its 'child' on the basis of a transferred licence], to detect potential tax evasion, leading to a tax dispute. Royalty/Licence fee 6. Coming to the facts. As submitted by Xiaomi India they are engaged in the business of selling consumer electronic goods. As of now, they do not manufacture goods in India. Mobile phones, television and power banks are either imported by Xiaomi India from Xiaomi China and their affiliates [Xiaomi China] or got manufactured from their CM's in India. 6.1 They further state that under different Agreements, Xiaomi India is required to pay the following royalty/licence fee to Qualcomm in respect of import of finished/complete goods by Xiaomi India related firms for the purpose of tr....
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....ted 1.1.2017) Xiaomi, H.K. China, Zhuhai, Xiaomi China Beijing Xiaomi Licensed software and hardware technology License fee @2% of Xiaomi India' revenue generated from selling of permitted products 6.3 As per para 8.1 of the OIO: -- Xiaomi India was incorporated on October 7, 2014 under the Companies Act, 2013 as a subsidiary of Xiaomi Singapore Pte. Ltd., Singapore (holding company). 99.90 % of the total equity shares of Xiaomi India are held by the holding company Xiaomi Singapore Pte. Ltd. and 0.10% is held by its fellow subsidiary company Xiaomi H.K. Limited. -- Xiaomi Corporation, Cayman Islands is the flagship holding company and Xiaomi Singapore Pte. Ltd. is the holding company of Xiaomi India. Beijing Xiaomi Mobile Software Co. Ltd., China; Xiaomi Communications Co. Ltd., China; Xiaomi Inc., China; Xiaomi H.K. Limited, Hongkong; Zhuhai Xiaomi Communications Co. Ltd., China and Xiaomi Communications Logisitcs India Private Limited, India are the fellow subsidiaries of Xiaomi India. -- Xiaomi India is engaged in the distribution and trading of the consumer electronic products comprising of phones, IoT (Internet of things) and lifestyl....
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....proving a claim or defence is on the party who asserts it. 42. Section 102 of the Evidence Act, 1872 provides a test regarding on whom the burden of proof would lie, namely, that the burden lies on the person who would fail if no evidence were given on either side. Whenever the law places a burden of proof upon a party, a presumption operates against it. Hence, burden of proof and presumptions have to be considered together. There are however exceptions to the general rule as to the burden of proof as enunciated in Sections 101 and 102 of the Evidence Act, 1872, i.e., in the context of the burden of adducing evidence: (i) when a rebuttable presumption of law exists in favour of a party, the onus is on the other side to rebut it; (ii) when any fact is especially within the knowledge of any person, the burden of proving it is on him (Section 106). In some cases, the burden of proof is cast by statute on particular parties (Sections 103 and 105). 43. There is an essential distinction between burden of proof and onus of proof; burden of proof lies upon a person who has to prove the fact and which never shifts but onus of proof shifts. Such a shifting of onus is a cont....
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....21. The law recognises that within the standard of preponderance of probabilities, there could be different degrees of probability. This was succinctly summarised by Denning, LJ in Bater v. Bater [Bater v. Bater, [1951] P. 35 (CA).], where he formulated the principle thus: (p. 37) "So also, in civil cases, the case must be proved by a preponderance of probability, but there may be degrees of probability within that standard. The degree depends on the subject-matter." (emphasis supplied) 722. The definition of the expression "proved" in Section 3 of the Evidence Act is in the following terms: "3. "Proved".- A fact is said to be proved when, after considering the matters before it, the court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of the particular case, to act upon the supposition that it exists." 723. Proof of a fact depends upon the probability of its existence. The finding of the court must be based on: 723.1 The test of a prudent person, who acts under the supposition that a fact exists. 723.2 In the context and circumstances of a particula....
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....be expressed in terms of units to be mathematically enumerated as to how many of such units constitute proof beyond reasonable doubt. There is an unmistakable subjective element in the evaluation of the degrees of probability and the quantum of proof. Forensic probability must, in the last analysis, rest on a robust common sense and, ultimately, on the trained intuitions of the Judge." (emphasis added) 'Proved' 'Disproved' and 'Not Proved' 7.3 The Hon'ble Supreme Court of India in RVE Venkatachala Gounder Vs Arulmigu Viswesaraswami and VP Temple [(2003) 8 SCC 752], has examined the legal terms 'proved'. It held: "28. Whether a civil or a criminal case, the anvil for testing of 'proved', 'disproved' and 'not proved', as defined in Section 3 of the Indian Evidence Act, 1872 is one and the same. A fact is said to be 'proved' when, if considering the matters before it, the Court either believes it to exist, or considers its existence so probable that a prudent man ought, under the circumstances of a particular case, to act upon the supposition that it exists. It is the evaluation of the result drawn by applicability of the....
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....telligent reasoning. The Court went on to observe that the doctrine of presumption is not alien to such a rule, nor would it impair the temper of the rule. On the other hand, if the traditional Rule relating to burden of proof of the prosecution is allowed to be wrapped in pedantic coverage, the offenders in serious offences would be the major beneficiaries and the society would be the casualty. 7.4 We can now examine the issues involved. I. Whether the CM's are the importers of the parts and components 8. Submissions made by Xiaomi and Ors: (i) The parts and components were not imported on behalf of Xiaomi India by the third-party CM's, the said goods were imported on their own account for manufacture of mobile phones. (ii) The Respondent does not have any control over the imported components and thus, they should not be treated as 'beneficial owner'. (iii) Where one person declared and accepted to be the importer between importation and clearance, another person cannot be treated as importer after clearance of goods. (iv) As per the Hon'ble Supreme Court's judgment in the case of Commissioner of C. Ex., Goa Vs Cosme Farma Laboratories ....
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....ral order must be confirmed by an Order Form within 3 days from the Oral order. The said Order shall be treated as offer for purchase and the supplier at its discretion accept the order. The supplier shall arrange for the delivery of the products in accordance with the Customer's instruction on the Order Form. e. Clause 6: The Delivery of products shall be made by the Supplier and the risk or loss or damages of the products passed to Customer at the Delivery point. The Third-Party Manufacturers shall conduct the inspection of products after delivery according to the specification and the Customer shall give written notice of rejection to the Supplier on account of any defects by reason of quality, delivery, etc. In case the Third-Party Manufacturer fails to give notice of rejection except for any defect which is not one that would be apparent on reasonable inspection, the product shall be conclusively presumed to comply with specifications and accordingly accepted by the Customer. f. Clause 7: The Third-Party Manufacturer is responsible for obtaining at its own cost such import licenses and other consents in relation to the products as are required from time to ti....
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....oducts and would indemnify the contract manufacturers for the losses, if any, incurred by them. (g) Zhuhai Xiaomi China had absolute control over import of components by contract manufacturers. (h) Contract Manufacturer can only sell the products in India to Xiaomi India. CM's can only resell the products (parts and components), in India with prior written consent of Zhuhai Xiaomi China. (i) Contract Manufacturer has the right to sell the scrapped Products after the said Products are made non usable or recyclable through appropriate methodology and in accordance with applicable laws. (j) All unused parts and components, finished or/and semifinished goods etc. are to be returned to Xiaomi India. (k) The intellectual property rights are Supplier's (or its licensor's) property. (l) If the CM's failed to pay/remit invoice value to the vendors of imported goods of Xiaomi brand mobile phones, Xiaomi India could hold their payments towards sale of finished Xiaomi hand mobile phones. (m) The CM's cannot repack the product without the consent of supplier (n) All transaction/indirect taxes, fines, penalties, deposits mad....
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....S OF DEMAND a. Customer shall notify such Supplier in writing of the following estimations (without any liability to customer) and shall ensure that such estimates are accurate and complete. Such estimates shall not constitute Orders - its estimated Orders for each Month, at least one (1) calendar month before the start of that Month - other estimations that the Parties deem necessary, or - any revisions to the above estimates, immediately once they are made. b. It is agreed that trade terms and conditions with respect to price freeze (in short T&Cs) of the Products shall be negotiated between Supplier and the including affiliated companies of Customer, that is, except for the locally purchased Products in India (the price and T&Cs shall be finally approved by Supplier), the unit prices and trade terms and conditions of all the Products used for production shall be negotiated by Supplier and SIV and Customer is not responsible for relevant material price and T&Cs negotiation, and Supplier shall negotiate the price and Customer shall place Orders to SIV based on such price, provided all changes in the cost related to Products and its proc....
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....on between Supplier and SIV and Customer shall consent to the varied List Prices by giving to Supplier a written confirmation within ten (10) days after receiving Supplier's notice, failing which the relevant orders yet to be accepted by Supplier shall be deemed to be withdrawn by Customer. The price applicable to each Order shall be the latest version of the List Prices for the Products. c. Supplier shall invoice Customer from time to time for the Net Selling Price of any Orders accepted by Customer d. Customer shall pay to Supplier the total amount of each invoice in US currency by wire transfer to Supplier's bank account within ninety (90) days from the date of B/L. All taxes including GST, VAT, Customs Duty, Customs Handling Charges, Transport cost from CIF, Port to Factory Site, Transit Insurance, etc., payable in India shall be borne by Customer. All amounts due to the Supplier under this Agreement shall become due immediately if this Agreement is terminated or novated despite any other provisions provided that the amount with respect to the specific invoice is due only on the effect of termination. ***** ***** ***** 12. INTELLECTUA....
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....tions for the mass production. Buyer shall ensure that the technical documents are complete, detailed, valid, practical and accurate and Buyer should provide technical support during the Mass Production Phase. Once Seller receives and accepts the specification standards and other terms mentioned in such Notice from Buyer, it will be deemed that Seller has confirmed the Specification of the mass production products and Seller shall commence the mass production pursuant to the Specifications, subject to the receipt of demand forecast. 7. TRANSFER OF TITLE AND RISK OF LOSS Title to Goods shipped under any Purchase Order passes to Buyer upon EXW Delivery Location as per, Incoterms 2010. To Buyer, provided, if Buyer fails to pay for the Goods as per the payment cycle even after mutual discussion between the Parties, Seller has an encumbrance over the Goods, Bailed Property, etc., till such time all the payments in respect of the same is settled by Buyer as per the terms of the payment cycle. 8. PRICE AND PAYMENT a. PRICE: Subject to Clause 8(b) below, Buyer shall purchase the Goods from Seller at the prices based on mutual discussion between the Parti....
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.... ii. Each of the Goods will be new and conveyed by Seller to Buyer with good title, free and clear of all Encumbrances, subject to Seller's right over the Buyer with respect to amounts due and outstanding from Buyer. iii. Withdrawal or Recall of Goods. If Buyer or a governmental authority determines and provides proof that any Goods sold to Buyer are defective and the defect is attributable to the bad workmanship of Seller, Seller shall undertake to rework such defective goods, more fully explained herein in this Agreement. 8.2.5 Relevant portions of the Contract II (b) between Flextronics Technologies (India) Private Limited (Seller) who is a contract manufacturer-appellant and Xiaomi Technology India Private Limited (Buyer), is stated below:- 1. DEFINITIONS:- **** *** "Background Intellectual Property Rights" means Buyer's Intellectual Property or Seller's Intellectual Property, as applicable, except for any Foreground Intellectual Property Rights and except for Designing and Manufacturing Methods "Buyer's Intellectual Property" means all Intellectual Property Rights owned by or licensed to Buyer, including all Foregroun....
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....luding all registrations and applications for, and renewals or extensions of, such rights or forms of protection pursuant to the Laws of any jurisdiction throughout in any part of the world. "Patents" means all patents (including all reissues, divisionals, provisionals, continuations and continuations-in-part, re-examinations, renewals, substitutions and extensions thereof), patent applications, and other patent rights and any other Governmental Authority-issued indicia of invention ownership (including inventor's certificates, petty patents and patent utility models). "Seller's Intellectual Property" means all Intellectual Property Rights owned by or licensed to Seller, including any of Seller's Background Intellectual Property Rights used in the design, production and manufacturing of the Goods and any Designing and Manufacturing Processes. "Trademarks" means all rights in and to China, India and foreign trademarks, service marks, trade dress, trade names, brand names, logos, symbols, trade dress, corporate names and domain names and other similar designations of source, sponsorship, association or origin, together with the goodwill symboliz....
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....disclose or transfer Buyer's Background Intellectual Property Rights to any other third parties in any manners without prior written consent of Buyer. Buyer does not transfer or grant to Seller any of its Background Intellectual Property Rights except for the rights stated in this paragraph. [Clause 8 (including 8.2 and 8.2.d.3) reproduced above, will be referred to as the 'ring fencing clause' in this order for brevity. Revenue has referred to it in their appeal as 'full responsibility/liability of Xiaomi' for the clearance of products from the Indian Customs] 9.3.4 In the 'Supply Agreement' dated 05.07.2018, between Zuhai Xiaomi Communications Co. Ltd. and Xiaomi H.K. Ltd with Flextronics Tech (I) Pvt Ltd, some of the relevant provisions are stated as under: 8. RESALE The Customer is not permitted to resell the Products to any third parties without prior written consent of Supplier. Notwithstanding, in case of termination or partial termination hereof for a breach by Supplier or its Affiliate thereof, without prejudice to Supplier's trademark and related intellectual property, Customer will have right to resell the Products to third parties, to scrap o....
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.... it may he entitled, either party may terminate this Agreement with immediate effect by giving written notice to the other party if: (a) the other party commits a material breach of any term of this Agreement which breach is irremediable or (if such breach is remediable) fails to remedy that breach within a period of fourteen (14) days after being notified in writing to de so, (b) the other party repeatedly breaches any of the terms of this Agreement in such a manner as to reasonably justify the opinion that its conduct is inconsistent with it having the intention or ability to give effect to the terms of this Agreement: (c) the other party, being the Customer, fails to pay any undisputed amount due under Clause 7.1 within fourteen (14) days after being notified in writing (d) any step has been taken in any jurisdiction to initiate any process by or under which (i) the ability of the creditors of the other party to take any action to enforce their debts is suspended, restricted or prevented; (ii) some or all of the creditors of the other party accept, by Agreement or in pursuance of a court order, an amount less than the sums ow....
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....s per a pricing model that is based on cost construction and the CM's are not free to fix their own price for the sale of the finished mobile phones. Hence the exclusion of the royalty/ license fee from the price structure although it pertains to a whole-portfolio/ whole-device license, can be reasonably presumed to be at the behest of the dominant party which is Xiaomi India. The CM's have no effective control on the inputs and only get paid a manufacturing cost for assembling/ manufacturing the finished mobile phones. Any material breach of the restrictive conditions could lead to the rights and licences of the Parties under the Agreement being terminated depriving the CM's of further supply of goods. Hence it can be said that the CM's did not enjoy unfettered rights of possession of the imported goods. 8.2.7 The issue of possession of goods came to be examined by the Hon'ble Supreme Court in the case of Gunwantlal Vs The State Of Madhya Pradesh [AIR 1972 SC 1756 / (1972) 2 SCC 194], relating to the possession of a firearm in a criminal case. The Hon'ble Court held: "The concept of possession is not easy to comprehend as writers of (sic) have had occasions to point ou....
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....t is called an agreement to sell. (4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. (emphasis added) 8.2.9 In the contract under dispute the transfer of the property in the goods, if any, is to take place at a future time, subject to some condition thereafter to be fulfilled, the contract is hence at best an agreement to sell, which shall be examined below and not a contract for sale. Further a contract to sell unascertained goods which are also not in existence is not a complete sale, but a promise to sell. We may now examine whether at all a sale takes place between the parties in terms of the Sale of Goods Act as per the issues raised by Xiaomi India in their submissions. 8.2.10 In Association of Leasing and Financial Service Companies Vs Union of India, [(2011) 2 SCC 352 = 2010 (20) S.T.R. 417 (S.C.)], the Apex Court held: "42. The word "sale" is a nomen juris. It is the name of a consensual contract. The law with regard to chattels is embodied in the Sale of Goods Act. A contract of sale is different from an agreement to sell and unlike ....
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....Commissioner of Service Tax, Delhi Vs Quick Heal Technologies Limited - 2022 SCC Online SC 976]. Thus, for the parts and components to have been a contract for 'use of goods' by the CM's, it must pass the above test laid out 'BSNL' and more. To show that it is a contract of sale, it would be necessary to also show that transfer of property took place. If the rights including those of control over the goods remains with the seller then it cannot be said to be an actual sale. It should be shown, apart from what is stated in the agreements, that the seller transfers the right of possession and effective control of the parts and components to the CM's and the transaction is not a mere grant of permission or licence to use the goods for manufacture of goods and sale only to Xiaomi India or that the Agreement is so worded to disguise a service contract as a sale to the CM's. 8.2.12 Xiaomi submits that the Third-Party Manufacturers are operating under the globally recognised concept of 'Electronic contract manufacturing (ECM) company' that design, manufacture, test, distribute, and provide return/repair services for electronic components and assemblies for original equipment manufactur....
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....facture' as defined under the Central Excise Act. No parallels can be drawn. In Hari Khemu Gawali Vs Deputy Commissioner of Police, Bombay and another [AIR 1956 SC 559], a Constitution Bench of the Apex Court stated: "It has been repeatedly said by this Court that it is not safe to pronounce on the provisions of one Act with reference to decisions dealing with other Acts which may not be in pari materia." 8.2.13 Further in this case what is of importance is not the pedigree of the contract manufacturer, but whether in terms of the contract they as buyers of the goods enjoy the bundle of rights that comes with ownership of the parts and components subsequent to sale/ purchase. We find that the concept of 'Electronic Contract Manufacturing' (ECM) company is akin to that of a job worker. Such an arrangement does not make the CM's the owners of the goods while they manufactured phones for original equipment manufacturers (OEMs), which in this case was Xiaomi. The supplier Xiaomi China has exercised complete and dominant control, over the manner of use; disposal and sale of the parts and components; resale; construction of the sale price and constructive possession of the go....
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....t Sales Tax Officer v. B. C. Kame, Proprietor Kame Photo Studio, (1977) 1 SCC 634 : (AIR 1977 SC 1642 : 1977 Tax LR 2047) was called upon to decide the question that when a photographer undertakes a photograph and thereafter supplies prints to his clients whether it could be said that he had entered into a contract for sale of goods. The question which this Court posed was whether the contract is a contract of work and labour or a contract for sale. It held that a contract for sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer where, however, the principle object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one of work and labour. After referring to the earlier decisions of this Court in the case of State of Himachal Pradesh v. Associated Hotels of India Ltd., (1972) 29 STC 474 : (AIR 1972 SC 1131 : 1972 Tax LR 1937) and the State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd., (1958) 9 STC 353 : (AIR 1958 SC 560), in which case the Constitution Bench had held that in a building contract the property materials do not pass to the ot....
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.... i) Since the imported parts and components are incorporated into finished mobile phones for subsequent sale by Xiaomi India, the latter is deemed to be the entity on whose behalf the goods are imported, thereby Xiaomi India are the "beneficial owner" according to Section 2(26) of the Customs Act. It is in this regard that Xiaomi India undertakes to reimburse the CM's for transaction taxes etc. [see: ringfencing clause] Discussion on Submissions 9.2 The Black's Law Dictionary (2nd Pocket ed. 2001 pg. 508) defines 'Beneficial Ownership' as "a legal term where specific property rights ("use and title") in equity belong to a person even though legal title of the property belongs to another person." Under the Customs Act, the definition of importer is not tied down to the concept of owner of the goods as under the Sea Customs Act of 1878 and from 31.07.2017, includes a 'beneficial owner' for the purpose of the Act. 10.2.1 The Hon'ble Supreme Court in Doypack Systems Pvt Ltd Vs UOI [1988 (36) ELT 201 (SC) - para 40], stated that 'reliance may be placed on the principles of interpretation as enunciated by the Federal Court in Auckland Jute Co. Ltd. Vs Tulsi Chandra Goswam....
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....bility cannot be ensured. Tax evasion, harmful international tax planning and money laundering commonly create secrecy by layering of ownership through subsidiaries, corporations, trusts, investment funds and/or other legal vehicles to conceal the true ownership. Often "shell companies", which are corporate entities that have no independent activities, are set up only to own assets and other corporate entities. Transactions are spread across multiple jurisdictions, and may involve the ownership of assets for which there is no regulation or weak recording of ownership, and the creation of complex ownership chains involving multiple types of legal vehicles. The scale of illicit financial flows has been estimated to be in the hundreds of billions of dollars. Beneficial ownership transparency can reveal the true ownership and allow fair taxation and enforcement of the law. For anti-money-laundering purposes, the beneficial owner is the natural person who ultimately owns, controls or benefits from legal vehicles such as companies, partner-ships and trusts." (emphasis added) 10.4 Very recently the 'Beneficial Ownership and Tax Transparency - Implementation and Remain....
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....to the Indian government totaling US$13.0 billion, or the equivalent of 5.5 percent of the value of India's total government revenue collection that year. Domestic 11. The concept of beneficial ownership and its disclosure in India began with the Companies Act, 1956, having been absent in earlier laws relating to companies, like the Registration of the Joint Stock Companies Act, 1850; Joint Stock Companies Act, 1857; Companies Act, 1866 or the Companies Act, 1913. It was later addressed in the Benami Transactions (Prohibition) Act, 1988, and further defined under section 2(1)(fa) of the Prevention of Money Laundering Act, 2002 (PMLA) as well as Rule 9(3) of the The Prevention of Money Laundering (Maintenance of Records) Rules, 2005. The Income Tax Act, 1961 added a definition of "beneficial owner" in section 139(1) from 2016, while the Customs Act, 1962 incorporated the term the next year by the insertion of Section 2(3A) with effect from 31.03.2017. The Companies (Significant Beneficial Owners) Rules, 2018 which came into effect on 13.06.2018, was introduced in the context of section 90 of the Companies Act, 2013. It may be stated that the object and purpose of the various A....
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....on given under clause 3 of the General Clauses Act, 1897, unless there is anything repugnant in the subject or context. Section 3(42) of the said Act defines 'person', as under: (42) "person" shall include any company or association or body of individuals, whether incorporated or not; (emphasis added) 12.3 The understanding of parties to the Agreement is also similar. As per Contract - I above, A 'Person' includes any individual, partnership, corporation, trust, limited liability entity, unincorporated organization, association, governmental authority, or any other entity. 12.4 Xiaomi India which was incorporated on October 07, 2014 under the Companies Act, 2013, is hence covered by the definition of 'person'. The question next is on whose behalf the goods are being imported or exported. 12.5 Xiaomi India and others have referred to the case of a Coordinate Bench of this Tribunal sitting at New Delhi, in the case of Pawan Munjal Vs Commissioner, Customs-New Delhi [FINAL ORDER NO. 50283/2022, Dated: 28.03.2022]. The said order has merged into the Judgment of the Hon'ble High Court of Delhi in Commissioner Of Customs, New Customs House, New Delhi Vs Pawan Kant Mu....
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....ense so as to defeat the avowed object of the Legislature - Ref : C.A. Abraham v. ITO, Kottayam, AIR 1961 SC 609, p. 612. The principle behind this rule is that an enactment designed to prevent fraud upon the revenue "is more properly a statute against fraud rather than a taxing statute, and for this reason properly subject to liberal construction in the Government favour" - Ref : CRAWFORD, Statutory Construction, p. 508. So in interpreting a provision to plug leakage and prevent tax evasion a construction which would defeat its purpose should be eschewed and a construction which preserves its workability and efficacy should be preferred - Ref : Commissioner of Sales Tax, Delhi Vs Sri Krushna Engg. Co., (2005) 2 SCC 695, p. 703." (emphasis added) 14. We may now examine the relevant provisions of the Customs Act. Custom duty refers to the tax imposed on goods. Goods become liable to import duty or export duty when there is import into, or export from India. Section 12 of the Customs Act 1962, which is the charging section, states: "12. Dutiable goods (1) Except as otherwise provided in this Act, or any other law for the time being in force, duties of Cu....
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....ce with the provisions of this Act and the Customs Tariff Act; (c) exemption or concession of duty, tax, cess or any other sum, consequent upon any notification issued therefor under this Act or under the Customs Tariff Act or under any other law for the time being in force; (d) the quantity, weight, volume, measurement or other specifics where such duty, tax, cess or any other sum is leviable on the basis of the quantity, weight, volume, measurement or other specifics of such goods; (e) the origin of such goods determined in accordance with the provisions of the Customs Tariff Act or the rules made thereunder, if the amount of duty, tax, cess or any other sum is affected by the origin of such goods; (f) any other specific factor which affects the duty, tax, cess or any other sum payable on such goods, and includes provisional assessment, self-assessment, re-assessment and any assessment in which the duty assessed is nil; (emphasis added) 14.4 When a duty of customs is chargeable on any goods by reference to their value, that 'Value' as per section 2(41) of the Customs Act, 1962 in relation to any goods means the value thereof determi....
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....automated system (or by data entry through a service centre) a bill of entry number is generated by the Indian Customs Electronic Data Interchange ("EDI") System. The self-assessed copy of the bill of entry may be electronically transmitted to the authorized person under the deeming fiction which is created by Regulation 4(2). Hence, the bill of entry is deemed to be filed and the self-assessment completed when the requirements of Regulation 4(2) are fulfilled namely by the (i) entry of the declaration on the customs automated system; and (ii) generation of a bill of entry number by the EDI system. Following this, the self-assessed copy of the bill of entry is electronically transmitted to the authorized person." (emphasis as in original) The normal procedure for the clearance of imported goods. 15. Ownership of goods is not an essential condition to be an importer. In the normal case the transaction value of the goods as declared by the importer, who as per section 46 presents a bill of entry declaring the transaction value, forms the basis for the valuation of the goods. In the absence of a dispute the process moves smoothly. If the royalties and licence fees paid ....
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.... (b) any wilful mis-statement; or (c) suppression of facts, by the importer or the exporter or the agent or employee of the importer or exporter, the proper officer shall, within five years from the relevant date, serve notice on the person chargeable with duty or interest which has not been so levied or not paid or which has been so short-levied or short-paid or to whom the refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice. (emphasis added) 15.3 Ordinarily the goods can be imported by a consignee of the goods who is either its owner or beneficial owner or any person holding himself out to be the importer, and not by more than one person simultaneously. However as per section 28(4) (which deals with cases of aberration from the normal procedure), if duty is to be demanded for a blameworthy conduct, for reasons listed in the section, committed by the importer or the exporter or the agent or employee of the importer or exporter, notice has to be served on 'the person chargeable with duty or interest'. Hence in the situation listed in section 28(4), the person from whom duty is to ....
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....surp the identity of an importer from the person who filed the bill of entry. In other words, the person in whose name the bill of entry is filed does not cease to be an importer. Support was also taken from the Judgment of the Hon'ble Madras High Court in the case of J.B. Trading Corporation Vs Union of India reported in 1990 (45) ELT 9 (Mad.), the Coordinate Bench of this Tribunal in Perfect Commodity Impex Vs Commissioner of Customs, Kandla reported in 2003 (161) ELT 316 (Tri-Mumbai); Nalin Z. Mehta Vs Commissioner of Customs, Ahmedabad reported in 2014 (303) ELT 0267 and to CC (EP), Mumbai Vs Virendra Kanshiram Gandhi reported in 2003 (155) E.L.T.128 (Tri. - Mumbai), wherein the Hon'ble Tribunal relying on the report of the select committee held that the demand under Section 28 can be raised on the importer who filed the bill of entry and it cannot be demanded from any other person. We shall examine the crux of these judgments below. 17.1 The Apex Court in Union of India Vs Sampat Raj Dugar And Anr [AIR 1992 SUPREME COURT 1417, 1992 (2) SCC 66, (1992) 58 ELT 163 SC] has held that where an importer abandons the imported goods and does not pay for them he cannot be treated as ....
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....e allowed some play in the joints. It further went on to hold: "10. . . The court must always remember that 'legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry'; 'that exact wisdom and nice adaptation of remedy are not always possible' and that judgment is largely a prophecy based on meagre and uninterpreted experience'. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. . . ." (emphasis added) 17.3 The Apex Court in its judgment noted that the menace of black money has reached such staggering proportions that it is causing havoc to the economy of the country and poses a serious challenge to the fulfilment of our objectives of distributive justice and setting up of an egalitarian society. The concept of beneficial ownership....
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....or short-paid or to whom the refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice. The sub-section needs to be read in a manner that it can effectively stem the mischief that the insertion of the word 'beneficial owner' in the Customs Act was meant to achieve, considering the evolving history of the term in the Indian context and the rapid growth of this relatively new white collar crime worldwide. Hence once the foundational facts have been proved in this case, a purposive interpretation of the term 'beneficial owner', depending both on the text of the definition and the context in which sub-section (4) of section 28 has been freed from the requirement of demanding duty from the person who filed the Bill of Entry only, must help us in determining the legislative intent in favour of revenue. Hence in the peculiar facts of this case, including the ring fencing of the CM's from Government related demands and making it reimbursable to the CM's as discussed earlier, duty can be demanded from the beneficial owners. A three Judge Bench of the Apex Court in Vijay Madanlal Choudhary Vs Union Of India [2022 SCC ONLINE SC 929]....
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....t in cases involving complex transactions involving multiple parties and contracts, a non-signatory may be substantially involved in the negotiation or performance of the contractual obligations without formally consenting to be bound by the ensuing burdens, including arbitration (para 91). Therefore, there is a need to adopt a modern approach to consent, in matters of arbitration, which takes into consideration the circumstances, apparent conduct, and commercial facets of business transactions (para 92). Though the facts and issue differ from the present issue the need for considering the circumstances, apparent conduct, and commercial facets of business transactions, needs to be adopted. This approach is not new. The Hon'ble Supreme Court has also in other judgments recogonised new developments leading to various different kinds of crimes and issues, unforeseen by the Legislature, come to immediate focus. Such situations have been tackled by the Apex Court by approving of the principle of 'updating construction'. 17.6 In the case of Senior Electric Inspector Vs Laxminarayan Chopra [(1962) 3 SCR 146] and J.K. Cotton Spinning & Wvg Mills Ltd. Vs Union of India [AIR 1988 SC 191],....
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....ir submissions. Hence when the changes made in the definition of importer is made in the Customs Act, to include 'beneficial owner', the history of the term showing the significant role it plays in tax transparency, the integrity of the financial sector and law enforcement efforts, the ring fencing clause in the Agreement with CM's etc, all point to the deceptive nature of a service contract being passed of as a contract for sale. All these leads to the conclusion that the SCN satisfies the provisions of the said section and the duty sought to be demanded from Xiaomi Inia cannot be faulted. 19. The matter can be looked at from another angel. Facts (which are in the special knowledge of the appellants), if otherwise than that alleged by revenue, must be demonstrated by them (section 106 of the Evidence Act, 1872 / section 109 of the Bharatiya Sakshya Adhiniyam, 2023). Especially when the issue involves complex, layered ownership and control structures of Xiaomi, coupled with equally complex multiple agreements. It must be shown that both the legal ownership and the beneficial ownership vests with the CM's at the time of import. The appellants have relied on the agreements to stat....
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....mponents or mobile phones. vii) Payment of licence fee under the MSA was not made as a condition of sale of mobile phones and/or components of mobile phones. Payment of licence fee under the MSA was towards the post-import activity and functioning of mobile phones. viii) Licence fee is subject to earning of profit. Licence fee was not paid during various financial years even though the components were imported by third party manufacturers during those financial years - this also shows that the licence had no nexus with imported goods. ix) The LRAA and PP agreements are independent of each other, and no condition requires payment of royalty as a condition of sale of goods. x) Mere fact that imported components could have not served any purpose without payment of royalty cannot be the reason for addition of royalty to the value of components: 21.1 Submissions made by revenue: i) The payment of licence fee/royalties was required to operate the entire business of import and sale in strict conformity with the conditions of SULA and MPLA between Qualcomm the Xiaomi group. The parts/components imported contain or incorporate the IPRs of Qual....
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....ible in the assessable value or not. It was only after initiation of investigation by the DRI that Xiaomi India informed SVB, Bangalore about these agreements in the month of October, 2019. This also shows suppression of fact and willful misstatement on the part of Xiaomi India. 21.2 Discussion on Submissions 21.3 The payment of royalty to Qualcomm Inc. and Beijing Xiaomi by Xiaomi India as per the various Agreements, was for the Xiaomi brand Mobile Phones manufactured by their contract manufacturers in India viz. Rising Star, Hi-Pad, Flextronics, DBG Technology as well as for the complete Xiaomi brand mobile phones imported by Xiaomi India from Xiaomi China. 21.4 Assessment of duty as defined under section 2(2) of the Customs Act 1962 and the determination of the value of imported goods as per section 14 (ibid) and the Valuation Rules has been discussed above. As per Commissioner of Customs Vs. Ferodo India (P) Ltd. [AIR 2008 SC (SUPP) 1345 / (2008) 3 SCALE 153], which has been relied upon by Xiaomi India and others, under rule 9(1)(c), [Rule 9 of the 1988 valuation Rules is now Rule 10 of the 2007 Valuation Rules], the cost of technical know-how and payment of royalty is....
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....e, referred to above, had direct nexus with the functioning of the imported plant and, therefore, it had to be loaded to the price thereof. 18. Royalties and licence fees related to the imported goods is the cost which is incurred by the buyer in addition to the price which the buyer has to pay as consideration for the purchase of the imported goods. In other words, in addition to the price for the imported goods the buyer incurs costs on account of royalty and licence fee which the buyer pays to the foreign supplier for using information, patent, trade mark and know-how in the manufacture of the licensed product in India. Therefore, there are two concepts which operate simultaneously, namely, price for the imported goods and the royalties/licence fees which are also paid to the foreign supplier. Rule 9(1)(c) stipulates that payments made towards technical know-how must be a condition pre-requisite for the supply of imported goods by the foreign supplier and if such condition exists then such royalties and fees have to be included in the price of the imported goods. Under rule 9(1)(c) the cost of technical know-how is included if the same is to be paid, directly or indirec....
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....ed in the price actually paid or payable. Explanation - Where the royalty, licence fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (c) and (e), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods. . . . (4) No addition shall be made to the price actually paid or payable in determining the value of the imported goods except as provided for in this rule. *****. *****. ***** Notes To Rules Rule 10 (1) (c). - The royalties and licence fees referred to in rule 10 (1)(c) may include among other things, payments in respects to payments, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price actually paid or payable for the imported goods in determining the customs value. 2. Payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for t....
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....n Courts have interpreted the erstwhile Rule 9 and present Rule 10 of the Valuation Rules. However, it is also true that each of these judgments is an authority in the setting of its own facts. We may still try to find some common principles involved. A) Collector Of Customs(Preventive) Vs Essar Gujarat Ltd. [1996 (88) ELT 609 (SC)] (1) Without a licence from Midrex, the plant would be of no use to EGL. Therefore, in our view, obtaining licence from Midrex was a pre-condition of sale. (2) Midrex has granted licence to EGL not only for the right to produce in the Midrex Direct Reduction Process Plant and sell the products produced by the plant worldwide, but has also given the licensee (EGL) the right to use all patents, confidential information for the operation of the plant. (3) The EGL in this case was purchasing a Midrex Reduction Plant in order a produce sponge iron. In order to produce sponge iron it was essential to have technical know-how from Midrex. It was also essential to have an operating licence from them. Without theses the plant would be of no value. (4) The plant would be of no value if it could not be made functional. EG....
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....able to import of goods which a fortiori would mean that the amounts must be payable as a condition of import. (2) A distinction, therefore, clearly exists between an amount payable as a condition of import and an amount payable in respect of the matters governing the manufacturing activities, which may not have anything to do with the import of the capital goods. E) Commissioner of Customs Vs Ferodo India (P) Ltd. - AIR 2008 SC (SUPP) 1345 / (2008) 3 SCALE 153 (1) Under Rule 9(1)(c), the cost of technical know-how and payment of royalty is includible in the price of the imported goods if the said payment constitutes a condition pre-requisite for the supply of the imported goods by the foreign supplier. (2) On the other hand, if such payment has no nexus with the wording of the imported goods then such payment was not includible in the price of the imported goods. (3) Royalties and licence fees related to the imported goods is the cost which is incurred by the buyer in addition to the price which the buyer has to pay as consideration for the purchase of the imported goods (4) This is because every importer/buyer is obliged to pa....
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....re relevant in this dispute. Only relevant portions of the Agreements are extracted for the sake of brevity. 22.1 First is the License and Royalty Arrangement. An Agreement between Beijing Xiaomi Mobile Software Co., Ltd. China ("Xiaomi Mobile") and Xiaomi Technology India Private Limited, India (Xiaomi India"). License and Royalty Arrangement "Premises WHEREAS, Xiaomi Mobile has obtained licenses from third party intellectual property holders with an enabling mechanism for the Affiliates of Xiaomi Mobile to use such third party intellectual properties and is entitled to seek reimbursement of royalty/ license fees from its Affiliates for the same. WHEREAS, Xiaomi Mobile is the developer and owner of certain proprietary technologies associated with the MIUI operating software. Xiaomi India wishes to take a license from Xiaomi Mobile to use the said proprietary software technologies in relation to the mobile phones which are distributed by Xiaomi India in India, and Xiaomi Mobile is entitled to collect license fee from Xiaomi India towards the same. WHEREAS, Xiaomi Mobile is the developer and owner of certain proprietary hardware technologies....
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...., nontransferable, limited license, in the territory of India, for the term of this Agreement, under which: . . . . - Xiaomi India can use the Licensed Technologies for the purpose of supplying, distributing, marketing and promoting the Permitted Products. 3. Payments 3.1. Pricing: In consideration of the grant of license to the Licensed Technologies as contemplated herein, Xiaomi India will pay an arm's length consideration to Xiaomi Mobile in accordance with the following schedule: *****. *****. ***** 7. Termination 7.2. Termination for Breach: Failure to pay or perform any obligation hereunder within the time prescribed shall constitute an event of material default. Failure to cure any event of material default within thirty (30) days after receipt of written notice describing the non-performance, or fifteen (15) days with respect to non-payment of funds, shall entitle the Party giving such notice to terminate this Agreement. 7.3. Effect of Termination: After the termination of this Agreement. Xiaomi India shall immediately: (a) pay all outstanding all License Fee due under this Agreement: (b) cease to f....
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....LCOMM's intellectual Property to (a) make (and have made), import and use Subscriber Units, (b) Sell (and offer to Sell) such Subscriber Units, but only to Unlicensed Customers (i.e., this provision - does not grant LICENSEE a license or any rights to directly or indirectly sell or offer to sell such Subscriber Units to Licensed Customers), and (c) to make and have_made), Components (provided such Components have been designed exclusively by LICENSEE and which design is owned and used exclusively by LICENSEE) and import, use and sell, offer to sell, lease and otherwise dispose of such Components but only if such Components are included as part of and incorporated within complete Subscriber Units Sold by LICENSEE in accordance with this Section 5.1 (or as replacement parts for such Subscriber Units previously sold by LICENSEE).- The licenses set forth in this Section 5.1 are intended to be fully exhaustive and include the right for LICENSEE and its sublicensed Affiliates to convey Pass-Through Rights to their respective Unlicensed Customers of Subscriber Units to the extent of patent exhaustion under U.S. law; provided, however, that (i) exhaustion will be deemed to occur regard....
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.... granted by Qualcomm in this Section 4 or as replacement parts for such Covered Products. Except as otherwise provided in this Section 4.6, no license, right or other authorization is granted by Qualcomm to make (or have made), import, use, Sell, offer to Sell, or otherwise dispose of any Components. *****. *****. ***** 7.5.4 Rights and Obligations upon Termination or Expiration. 7.5.4.1 Upon any termination or expiration of this Agreement (a) all licenses granted by a Party hereunder will terminate and (b) each Party shall, upon the written request of the other Party, use commercially reasonable efforts to return or destroy all Information furnished to it under this Agreement by the other Party, if any." (emphasis added) 22.4 Fourth is the MPLA. An Agreement between Qualcomm Incorporated, a Delaware corporation ("Qualcomm") and Xiaomi Communications Co., Ltd., a company organized and existing under the laws of the People's Republic of China ("Licensee"). MULTIPRODUCT PATENT LICENSE AGREEMENT (MPLA) "3. QUALCOMM LICENSES. 3.1 License Grant from Qualcomm for Covered Products. 3.1.1 License Grant. Subject to tim....
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....liates to convey Pass-Through Rights to their respective customers (but in the case of Multimode Semi Knockdown Kits, only to Unlicensed Customers) for Covered Products to the full extent of patent exhaustion under U.S. law; provided, however, that (i) exhaustion will be deemed to occur regardless of the country or jurisdiction in which such Covered Products are Sold, and (ii) if the law of the country or jurisdiction in which such Covered Products are Sold provides broader Pass-Through Rights than patent exhaustion under U.S. law, then such broader Pass-Through Rights shall apply. *****. *****. ***** 3.3 Limitations Regarding Components; Partial Termination. Except as provided in Sections 3.1(a) and (c), no license, right or other authorization is granted by Qualcomm to make, have made, import, use, Sell, offer to Sell, or otherwise dispose of any Components. The license to have made Components set forth in Section 3.1(c) will terminate as to any Components made for Licensee or any of its Affiliates by a particular manufacturer if such manufacturer or any of its Affiliates Asserts a patent claim Essential to a Covered Standard against Qualcomm or any of its Affil....
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....reement") pursuant to which - QUALCOMM granted LICENSEE a licence under certain QUALCOMM intellectual property to develop. Manufacture and sell certain wireless subscriber equipment. WHEREAS, in accordance with the terms and conditions of this Agreement, QUALCOMM is willing to deliver the Software (as defined below and identified from time to time in a Software Addendum) to LICENSEE for use solely with the corresponding QUALCOMM ASIC (as defined below and identified in the applicable Software Addendum): and WHEREAS, LICENSEE desires to receive the Software for its use in accordance with the terms and conditions of this Agreement. *****. *****. ***** 2. SOFTWARE. 2.1 Delivery of Software. QUALCOMM shall make commercially reasonable efforts to deliver the Software that is designed for use with the applicable QUALCOMM ASIC identified in a Software Addendum QUALCOMM shall have the right at its sole discretion to reschedule any releases of the Software as required, change the number of phases and/or releases, and/or modify the functionality contained in each phase and/or release. . . ." (emphasis added) 23. From a conspectus of th....
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....ce as the royalty base is appropriate because it (i) best accounts for the diverse patents in major portfolios, (ii) best reflects the value created by the licensed patents, (iii) provides freedom of operation to licensees to develop new devices and change component suppliers, and (iv) simplifies relationships between licensors and licensees, helping to avoid disputes. Major innovators in the cellular communications industry frequently hold patents on numerous different kinds of technologies used in cellular communications. They are likely to have patents covering chipsets, handsets, network infrastructure, protocols, and entire networks. The practical and efficient way to license such a broad portfolio is to license, and determine the royalty based upon the price of, the handset which uses all those features. Indeed, major portfolios will generally have patents that read on an entire device, and for those patents, the device price is the only natural and appropriate royalty base. Because any such patents should be licensed using the device price as the royalty base, it is practical and efficient to also use the device price as the royalty base for other patents that are licensed f....
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.... commercial convenience. The state is entitled to its tax. In cases where taxability is not disputed Courts do mould relief under the peculiar circumstances of individual cases, which cannot set a precedent. The Apex Court in Raja Jagannath Baksh Singh Vs State of U.P. & Anr. (AIR 1962 SC 1563) observed: ".... The power of taxation is, no doubt, the sovereign right of the State; as was observed by Chief Justice Marshall in M'Culloch v. Maryland [4 Law Edn.579 p.607] : "The power of taxing the people and their property is essential to the very existence of Government, and may be legitimately exercised on the objects to which it is applicable to the utmost extent to which the Government may choose to carry it." In that sense, it is not the function of the court to enquire whether the power of taxation has been reasonably exercised either in respect of the amount taxed or in respect of the property which is made the object of the tax." (emphasis as in original) Hence it is for Xiaomi and others to declare the facts about the number of patents involved with the imported goods at the time of import and pay duty accordingly, as the details are within their special kn....
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....omi India, states that royalty has to be paid for use of the said proprietary software and/or hardware technologies 'in relation to' the mobile phones, which has a very broad meaning. Such use i.e. 'in relation to' can be either direct or even indirect. [See: CCE Vs Rajasthan State Chemical Works - 1999 (55) ELT 444 (SC) and Union of India Vs Ahmedabad Electricity Co. Ltd - 2003 (158) ELT 3 (SC)]. The SULA between Qualcomm and Xiaomi China to grants the use of License from Qualcomm to make and have made, components and import, use and sell, offer to sell, lease and otherwise dispose of such components provided such components have been designed exclusively by Xiaomi and which design is owned and used exclusively by Xiaomi, is equally broad as per the industry norm. But such bunching cannot deprive the state of its taxes. It is not beyond modern technology to map specific goods/ processes used/ services rendered at different stages of a goods life. Moreover the explanation to Rule 10(1) provides that where the royalty, licence fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (c) and (e), such charges shall be added to the pr....
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.... CHANDRANNA Vs SHANKAR & ORS. [2025 INSC 5321, CIVIL APPEAL NO. 5401 OF 2025, Dated: 22.04.2025], it is well established that the contents in a document would prevail over any contrary oral evidence. 25. Moreover, unlike the averment of Xiaomi India and as per Note 2 to Rule 10(1)(c), payments made by the buyer for the right to distribute or resell the imported goods shall not be added to the price actually paid or payable for the imported goods if such payments are not a condition of the sale for exports to the country of importation of the imported goods. Since the Agreements above include royalty to be paid on account of bundled licensed software technologies and licensed hardware technologies, used for making, importing, using in the manufacture and selling of finished mobile phones and does not exclude the right to distribute or resell or bring it under a separate clause, all such rights are included in the payments and are a condition of the sale. 26. Xiaomi India have stated that even assuming that they themselves import the components, manufacture the mobile phones and sell them in the Indian market, the demand of customs duty on account of inclusion royalty will not ....
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....nnot sell the phones in India. Thus, royalty on finished mobile phones is a condition of sale and must be included in the invoice value as required by Rule 10(1)(C) of the CVR, 2007. 29. We can now examine the issue as per the principles emerging from the judgments of Constitutional Courts as stated above. It emerges that: a) In line with Rule 10(1)(c), there are two concepts which operate simultaneously in this case, namely, price for the imported goods and the royalties/licence fees which are paid to the IPR holder by the beneficial owner. b) Every importer/buyer is obliged to pay not only the price for the imported goods but he also incurs the cost of technical know-how which is paid to the IPR holder, and in this case is paid by the beneficial owner. c) The imported goods would have no value without a licence from Xiaomi, who holds the IPR rights through a licence from the IPR holder, for the imported goods and which is implemented through complex layer of Agreements. Any default in payment for the IPR rights would affect the right of the CM's to import and use components and to make and 'sell' finished mobile phones. Similarly, Xiaomi India would ....
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....dent for FY 2014-15 to 2017-18, audited by an independent auditor, and the FORM 3 CEB (Sl. No. 35 of Volume IV of Documents filed by the Respondent) for FY 2014-15 to 2017-18 which clearly indicated the payment of royalty under various agreements including the SULA, MPLA, and MSA. (iii) They relied on the case of Gupta Steel Vs Commissioner of Customs, Jamnagar, reported in 2015 (324) E.L.T. 29 (S.C.), wherein the Hon'ble Apex Court has held that when the department had full knowledge of the facts of the case, it cannot invoke extended period alleging misstatement and suppression. (iv) The CMs were established prior to the introduction of the concept of beneficial ownership under the Customs Act in 2017; accordingly, it cannot be concluded that the incorporation of CMs was solely intended to designate Xiaomi India as the beneficial owner of imported components or to evade customs duties by excluding royalties from the valuation of these imports. (v) The Supreme Court in Commissioner Central Excise And Customs & Anr. Vs M/S. Reliance Industries Ltd. [2023 (385) E.L.T. 481 (S.C.)] affirmed that when two interpretations are possible, the invocation of the ex....
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....n the UN Brief. 31.4 As regards the averments made by Xiaomi India and other that they have made all the required declarations at the time of import, it has to be stated that the issue is not of form alone but of substance also. It is not merely fulfilling the declaratory provisions in para 2.06 of FTP or the Customs Act. When special situations are present which have a strong bearing on assessment the same should also be declared at the time of import and not lie buried in various documents made available to the department. Even the Hon'ble Supreme Court in M/s Safari Retreats (supra) have held that sometimes, bulky compilations and submissions can be counterproductive. Further a five judge Bench of the Hon'ble supreme court in Calcutta Discount Company Limited Vs Income-Tax Officer, Companies [1961 SCR (2) 241 / AIR 1961 SUPREME COURT 372], held: "This means quite clearly that the mere production of evidence is not enough, and that there may be an omission or failure to make a full and true disclosure if some material fact necessary for the assessment lies embedded in that evidence which the assessee can uncover but does not. If there is such a fact, it is the duty of....
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....f the Excise Act are missing in Section 28(1) of the Customs Act and the proviso in particular." Hence as per the statute "with intent to evade payment of duty" is not an essential condition for evoking the extended time limit. 31.5 As regards Xiaomi India's averment regarding Form 3CEBs and providing copies of Agreements etc. as per revenue, the disclosure of royalty payments to SVB took place only after investigations were started by DRI. Customs officers doing normal assessment work verify documents submitted believing them to be a true declaration of the facts declared. Assessment of imported goods are done as per section 17 of the Act. Relevant portion is reproduced below: "Section 17. Assessment of duty. - (1) An importer entering any imported goods under Section 46, or an exporter entering any export goods under Section 50, shall, save as otherwise provided in Section 85, self-assess the duty, if any, leviable on such goods. (2) The proper officer may verify the entries made under Section 46 or Section 50 and the self-assessment of goods referred to in subsection (1) and for this purpose, examine or test any imported goods or export goods or such part....
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....yable by them to M/s Qualcomm and M/s. Beijing Xiaomi leading to the short levy of duty at the time of import and hence the demand for duty under the extended period is justified. Whether interest is payable 32. Submissions of Xiaomi and Ors: 32.1 Xiaomi India submits that in the light of their submissions on merits it is evident that the demand of Customs duty under Section 28(4) of the Customs Act is not legally tenable. Thus, when no Customs duty demand can stand against the Respondent the demand of interest on such alleged short payment of Customs duty under Section 28AA of the Customs Act also cannot stand before the law as per the Judgment of the Hon'ble Hon'ble Supreme Court in the case of Pratibha Processors Vs Union of India reported in 1996 (88) ELT 12 (S.C.). 32.2 Xiaomi India and others have also submitted that no interest, penalty or redemption fine can be imposed on them insofar as it relates to the demand for differential IGST. This is because, during the relevant time, the Customs Tariff Act did not contain the relevant provisions for demanding interest and imposing penalties. Discussion on Submissions 32.3 We find that Pratibha Processors was a ca....
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....ed on them insofar as it relates to the demand for differential IGST, we find that this very Bench had examined the issue in its Final Order No 40320/2025, Dated : 11.03.2025 [M/s. Flextronics Technology India Pvt. Ltd. Vs Commissioner of Customs, Chennai VII Commissionerate, 2025 (3) TMI 695 - CESTAT, Chennai]. Relevant portion is extracted below: "No Interest or Penalty is leviable in the absence of machinery provision 6. The Appellant submits that IGST is levied under Section 3(7) of CTA. However, the CTA has limited provisions, and it borrows various provisions from the Customs Act for implementation of its provisions. Section 3(12) of the CTA, which is the borrowing provision with regard to IGST, did not borrow provisions of interest from the Customs Act. Therefore, it is submitted that interest cannot be recovered for non-payment of IGST which is chargeable under Section 3 of the CTA. 6.1 Section 3(12) of the Customs Tariff Act, 1975, as it stood just prior to the Finance (No 2) Act 2024 been notified on 16th August 2024, is extracted below for ease of reference: 3(12) The provisions of the Customs Act, 1962 (52 of 1962) and the rules and r....
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.... imposing interest and penalty on the portion of demand pertaining to surcharge or additional duty of customs or special additional duty of customs is incorrect and without jurisdiction." The said decision has been affirmed by the Hon'ble Supreme Court in Union of India v. Mahindra and Mahindra [2023 (8) TMI 135 - SC ORDER]. 6.3 We also notice that Section 3(12) of the Customs Tariff Act has been substituted, vide Finance (No 2) Act 2024 which was notified on 16th August 2024, specifically including 'interest' among others measures. The new sub-section is reproduced below. "(12) The provisions of the Customs Act, 1962 and all rules and regulations made thereunder, including but not limited to those relating to the date for determination of rate of duty, assessment, non-levy, short-levy, refunds, exemptions, interest, recovery, appeals, offences and penalties shall, as far as may be, apply to the duty or tax or cess, as the case may be, chargeable under this section as they apply in relation to duties leviable under that Act or all rules or regulations made thereunder, as the case may be.". (emphasis added) The legislature having now inco....
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..... b) Further the Adjudicating Authority failed to impose any redemption fine in lieu of confiscation, stating that the impugned goods are not physically available for confiscation. The Hon'ble SC judgement in the case of CC (Import), Mumbai Vs. M/s. Finesse Creations [2010(5)TMI 804-SC], cannot be considered as binding in nature as the appeal was dismissed "in limine" as "Delay condoned. The Civil Appeal dismissed". The SLP being dismissed at the stage of special leave without a speaking or reasoned order, there is no "res judicata", no merger of the lower order and the petitioner retains the statutory right if available of seeking relief in review jurisdiction of the High Court." Moreover the Hon'ble HC of Madras in the case of M/s. Visteon Automotive Systems Vs. The Customs (CMA No: 2857 of 2011 & MP No: 1 of 2011 dated 11.08.2017), which has held that physical availability of goods is not so much relevant for imposition of redemption fine. Hence the Ld. A.A. erred in not imposing a redemption fine even though the goods were not seized and were not available. 33.2 Discussion on Submissions For ready reference, Section 111(m) of the Customs Act is reproduced....
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.... set aside the order impugned and allow the appeal with consequential relief as per law." (emphasis supplied). The department filed a Civil Appeal against the above order of the Tribunal before the Apex Court [(184) E.L.T. A36 (S.C.)]. The Hon'ble Court ordered as under: "We see no reason to interfere with the impugned order. The appeal is dismissed." A Larger Bench of this Tribunal took note of the above judgments vide its order in SHIV KRIPA ISPAT PVT. LTD. Vs COMMISSIONER OF C. EX. & CUS., NASIK [2009 (235) E.L.T. 623 (Tri. - LB] and also that of the P & H High Court in Commissioner Vs Raja Impex Pvt. Ltd. - 2008 (229) E.L.T. 185 (P & H) and was of the opinion that confiscating the goods would not arise if there are no goods available for confiscation. Hence while the goods are liable for confiscation, they cannot be confiscated due to their physical unavailability or not being under a legal obligation to be produced. The Ld. AA has also considered the practical difficulties associated with confiscating goods that are not physically available, at para 33.5 of the impugned order, which is reasonable, legal and proper. The same is reproduced below: "33.5....
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....Ld. Adjudicating Authority in the impugned order as being without any basis. Detailed submissions are made below. Further in terms of the fifth proviso to Section 114A, it has been clearly provided that where penalty is levied under Section 114A, no penalty can be levied under Section 112 of the Customs Act. As regards section 114AA the intention is not to penalize an importer of goods, but to penalize those persons who fabricate documents to show export of goods without actually exporting any goods. The narration also concludes that the provision is to be used with due diligence and care so as to ensure that it does not result in undue harassment. Since it was not the intention of the government to impose penalty under section 114AA in such cases, and imposition of this penalty would result in undue harassment in the present case, no penalty is imposed on the Respondent under Section 114AA of the Customs Act, 34.1 Submissions made by revenue: Due to not declaring the correct value of imported goods, Xiaomi India has rendered the subject goods liable to confiscation under Section 111(m) of Customs Act, 1962. For its acts and omissions, Xiaomi India appeared to have rendered i....
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....ctures and contractual arrangements were used intentionally to avoid tax liabilities, including shifting royalty payment responsibilities and failing to disclose key agreements to authorities. Their claims of confusion due to the interpretative nature of the law are unconvincing, as willful suppression of facts was established. Therefore, the goods are subject to confiscation and those involved are liable for penalties under the relevant legal provisions. 34.3 The Hon'ble Supreme Court has in the case of Balkrishna Chhaganlal Soni Vs State of West Bengal [1974 AIR 120 / 1974 SCR (2) 107] while considering the cases of white collared crime observed as followed: "19. The penal strategy must be formed by social circumstances, individual factors and the character of the crime. India has been facing an economic crisis and gold smuggling has had a disastrous impact on the State's efforts to stabilize the country's economy. Smugglers, hoarders, adulterators and others of their ilk have been busy in their under-world because the legal hardware has not been able to halt the invisible economic aggressor inside. The ineffectiveness of prosecutions in arresting the wave....
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....can be imposed where the imported goods are not liable for confiscation under Section 111 of the Customs Act. Since we have already found that the goods were liable for confiscation under section 111 that argument does not hold water, and we find that the goods are liable for confiscation under section 112(a). Considering that the goods are found dutiable, as per discussions above, hence they are rightly liable to a penalty under section 112(a)(ii). However, since a penalty is also being imposed under section 114A, no penalty can be imposed under section 112 as per the fifth proviso to section114A. The same hence merits to be dropped. 22.3 Xiaomi and Ors claim that the intention of section 114AA is not to penalize an importer of goods, but to penalize those persons who fabricate documents to show export of goods without actually exporting any goods. The issue was examined by his very same Bench in M/s. Daebu Automotive Seat India Pvt. Ltd. Vs Commissioner of Customs, Chennai, FINAL ORDER NOS. 40785-40790/2025, Dated: 01.08.2025, as under: "19.6 Section 114AA, does not make confiscation a condition for the said penalty. In fact it does not make a reference to goods at all o....
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....be inferred, the necessity for employing rules of interpretation disappears and the authorities are bound to give effect to the said meaning irrespective of consequences. While analysing and interpreting the aforesaid provisions of law, it would be apposite to refer to rules laid down by Hon'ble Apex Court in Chief Commissioner of Central Goods and Service Tax & Ors. Vs. M/s Safari Retreats Private Ltd. & Ors. [(2025) 2 SCC 523], pertaining to interpretation of taxing statutes, which is reproduced hereunder:- "RULES REGARDING THE INTERPRETATION OF TAXING STATUTES 25. Regarding the interpretation of taxation statutes, the parties have relied on several decisions. The law laid down on this aspect is fairly well-settled. The principles governing the interpretation of the taxation statutes can be summarised as follows:- a. A taxing statute must be read as it is with no additions and no subtractions on the grounds of legislative intendment or otherwise; b. If the language of a taxing provision is plain, the consequence of giving effect to it may lead to some absurd result is not a factor to be considered when interpreting the provisions. It is for the....
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....confine the section only to export related misuse, would be to legislate into the section what the legislature itself has left out, which is impermissible. Read in this light, the wording of the section is neutral to a situation of import or export and can hence apply to the facts of either of the situations. 19.8 The appellant has referred to the comments of the Ministry of Finance made before the Standing Committee on Finance as seen from its Twenty Seventh Report on the Taxation Laws (Amendment) Bill, 2005 on 12.12.2005. At the risk of repetition it has to be stated that the Hon'ble Supreme Court while examining such a plea had in Anandji Haridas & Co. Pvt. Ltd vs Engineering Mazdoor Sangh [(1975) 3 SCC 862 / TS-5002-SC-1975-O], observed as below; "We are afraid what the Finance Minister said in his speech cannot be imported into this case and used for the construction of Clause (e) of Section 7. The language of that provision is manifestly clear and unequivocal. It has to be construed as it stands, according to its plain grammatical sense without addition or deletion of any words. As a general principle of interpretation, where the words of a statute are plain....
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....d by reason of willful suppression of facts Xiaomi India are liable for a penalty under section 114A of the Customs Act. We now take up revenue's plea that the penalty imposed under Section 114A of the Customs Act should be equal to the duty and interest in view of the clarification issued by the CBEC vide Circular No: 61/2002 dated 20.09.2002. We find that the matter has been examined by a Coordinate Bench of this Tribunal in the case of Sundaram Finance Ltd [2012 (279) ELT 220 (T-Chennai)], wherein the following has been held: "17. The above issue as to whether penalty under Section 114A should be imposed equivalent to the "duty demanded plus the corresponding interest accrued under Section 28AB of the said Act" instead of penalty equivalent to the "duty demanded" stands decided by this Bench in the case of Bharti Airtel & Others. The relevant findings are reproduced below : "21.2 At this stage, the appeals by the department on the quantum of penalties imposed on the appellant-assessees can be considered. In the said appeals, the prayer is for imposition of penalties equivalent to the "duty demanded plus the corresponding interest accrued under Section 28AB of t....
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....d order. Therefore, his imposing penalties equal to the duty determined is in order." Hence we are not in position to uphold the order of the Commissioner imposing penalty equivalent to aggregate of duty and interest . ." We concur with the above judgment of a Coordinate Bench that the statutory penalty under section 114A can only be equal to the duty demanded. VIII. Whether penalty can be imposed on Shri Sameer Bhatrahalli Sundar under section 112(a)(i) and 114AA of the Customs Act 36. Submissions by Shri Sameer Bhatrahalli Sundar: Shri Sameer Bhatrahalli Sundar is the Chief Financial Officer and Director of M/s. Xiaomi Technology India Private Limited. He was of the bona fide belief that royalty and license fees is not includible in the value of the imported goods and no disclosure of the aforesaid agreements was required to be made under the law. To attract penalty under Section 112(a)(i), the goods imported must be prohibited goods. However, in the present case, the imported goods are not prohibited goods and the same is an undisputed fact. Without prejudice, it is submitted that there cannot be any allegation of suppression/ misstatement etc. for non....
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....aterial particular, has been specifically alleged in the transaction of any business for the purposes of this Act, hence the section will also not apply against Shri Sameer Bhatrahalli Sundar Rao. Penalty proceeding mentioned in the SCN hence were correctly dropped by the Ld. AA. IX. Whether penalty can be imposed under Section 112(a) and Section 114AA on the Contract Manufactures 37. Submissions on behalf of the CM's: a) There is no evidence to suggest that the CM's had any knowledge of these agreements, much less in withholding these agreements from the department. b) As held in the impugned order, there is no liability on the contract manufacturers to discharge differential duty. c) The intention of the Section 114AA is not to penalize an importer of goods, but to penalize those persons who fabricate documents to show export of goods without actually exporting any goods. 37.1 Submissions made by revenue: a) The contract manufacturers, failed to discharge their responsibility to bring the true facts and circumstances of sale between their company and overseas supplier and the provisions of their respective agreements with seller (M/s. ....
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....resaid agreements from itself, which would have involved payment of duty on royalty at the import stage by the CM's, to M/s. Xiaomi India i.e. to the post manufacturing stage. The CM's hence willingly participated in the layering of transactions facilitating the evasion of taxes. They hence failed to disclose the true transaction details and agreements to the department, making the goods liable to confiscation and for them to be liable for penalties under Section 112(a). The Hon'ble Patna High Court in Syed Askari Hadi Ali Augustine Vs Union Of India And Ors. [1994 (42) BLJR 1389] at para 20 mentioned the following quote with approval; "20. In Howard De Walden (Lord) v. IRC [1942] 1 All ER 287 (CA) at page 289, Lord Greene observed : "For years a battle of manoeuvre has been waged between the Legislature and those who are minded to throw the burden of taxation off their own shoulders on to those of their fellow-subjects. In that battle, the Legislature has often been worsted by the skill, determination and resourcefulness of its opponents, of whom the present appellant has not been the least successful. It would not shock us in the least to find that the Legislature has de....
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....IGST. 39. Based on the facts and circumstances discussed above we modify and remand the impugned order on the following terms: I) We confirm the redetermined value of the impugned goods as stated at paras 19(i); 20(ii); 21(i) and 22(ii) of the impugned order. II) We confirm the differential duty with applicable interest as stated at paras 19(ii); 20(iii); 21(ii) and 22(iii) of the impugned order. III) Having determined the legal issues involved, we remand the matter to the Ld. Original Authority to redetermine the penalties on Xiaomi India and the Contract Manufacturers, in the light of the legal issues decided above. The said parties should also cooperate with the Ld. Original Authority in this regard. The parties are eligible for consequential relief if any as per law. The parties appeals and the Revenue's appeals are disposed of as above. (Order pronounced in open court on 14.11.2025) ============= Document 1 FLOW CHART OF THE BUSINESS MODEL OF XIAOMI INDIA XIAOMI CORPORATION, CHINA (FOUNDED IN 2010) HOLDING COMPANY SUBSIDIARY/GROUP COMPANIES XIAOMI M.K LIMITED, XIAOMI COMMUNICATION CO. LTD. XIAOMI TECHNOLOGY COMPANY LIMITED, ZHUHAJ, X....