Xiaomi Moves Supreme Court Against $72 Million Customs Duty Demand Over Royalty Payments

Chinese smartphone major Xiaomi has moved the Supreme Court of India challenging a customs ruling that held the company liable for alleged tariff evasion of nearly $72 million on royalty payments linked to imported mobile phone components. The case, now before the apex court, is being closely tracked by multinational manufacturers and investors as it could redefine the legal contours of India’s contract manufacturing ecosystem.

Dispute Over Royalty Inclusion in Import Value

The controversy stems from a November order of an Indian tax tribunal which concluded that the declared import value of smartphone components had been undervalued for at least three years prior to 2020. According to the tribunal, the assessable value should have included royalty payments—ranging between 2% and 5%—that Xiaomi paid to overseas technology licensors such as Qualcomm for the use of proprietary technologies embedded in the components.

Under Indian customs law, royalties that are intrinsically linked to imported goods can be added to the transaction value for the purpose of calculating import duties. The tribunal held that these payments were integral to the imported parts and therefore attracted customs duty.

Xiaomi, however, has argued before the Supreme Court that the ruling mischaracterised its role and incorrectly treated it as the “beneficial owner” of the imported components. The company maintains that the obligation to pay import duties rests with the contract manufacturers who physically import the goods and that its royalty payments are independent of the import transaction.

Wider Implications for Contract Manufacturing

In its January 15 court filing—reviewed by media but not publicly available—Xiaomi contended that the tribunal’s reasoning undermines established industry practice. The company warned that the order reflects what it described as an “implicit mistrust” of India’s contract manufacturing model and could disrupt long-standing commercial arrangements across sectors.

Legal experts suggest the case could set a precedent for how Indian customs authorities interpret royalty structures in cross-border supply chains. If the tribunal’s findings are upheld, companies in industries such as pharmaceuticals, automobiles, and electronics may face heightened scrutiny over technology licensing agreements tied to imported goods.

Tarun Jain, a New Delhi-based tax lawyer, observed that the Supreme Court’s ruling could clarify the extent of customs authorities’ powers to include related-party payments in the assessable value of imports. A judgment favouring the government may embolden authorities to examine whether companies exercise effective control over imported goods through contractual arrangements.

Contract Manufacturers Also in the Fray

Xiaomi’s former contract manufacturing partners—Flextronics Technologies India, a unit of Flex, and Bharat FIH, a subsidiary of Foxconn—have also reportedly challenged the tribunal’s order before the top court. Both companies are understood to be contesting the finding that royalty payments should form part of the customs valuation.

While Flex declined to comment, Foxconn and Xiaomi have not issued public statements on the ongoing litigation.

Potential Financial Impact

Under Indian law, the initial $72 million demand could escalate to more than $150 million once interest and penalties are factored in, should the company fail in its appeal. Such an outcome could significantly impact Xiaomi India’s financial position. The company reported profits of $31.7 million in the 2023–24 financial year, making the potential liability substantial relative to its earnings.

Xiaomi is already grappling with regulatory pressures in India. Since 2022, approximately $610 million of its funds have remained frozen following action by the Enforcement Directorate over alleged illegal remittances—allegations the company has consistently denied.

Broader Investment Climate Concerns

The dispute comes at a time when India is actively courting global manufacturers under its production-linked incentive schemes. Attracting companies such as Apple to expand local manufacturing has been a strategic priority for Prime Minister Narendra Modi’s government.

However, several multinational corporations—including Volkswagen and Samsung Electronics—are currently contesting significant import tax demands in Indian courts. These high-value disputes have raised concerns among foreign investors about regulatory certainty and tax predictability.

Meanwhile, market data indicates that Xiaomi’s share in India’s smartphone segment has declined sharply—from a peak of 31% in early 2018 to around 12% by December, according to industry estimates—adding commercial pressure to its ongoing legal and regulatory challenges.

Supreme Court Seeks Government Response

During a recent hearing, Xiaomi’s counsel argued that upholding the tribunal’s reasoning would create “chaos” in the manufacturing sector by blurring the distinction between importers and technology licensors. The Supreme Court has directed the Indian government to respond to Xiaomi’s plea that royalty payments unconnected to the act of import should not be subjected to customs duties.

The outcome of the case is expected to have far-reaching consequences—not only for Xiaomi but also for the broader interpretation of customs valuation rules in India’s rapidly expanding manufacturing economy.