Xiaomi India escalated its long-standing legal battle with Indian authorities by moving the Supreme Court to challenge a $72 million (₹653 crore) customs duty demand.
The case is being watched as a “test case” for the entire contract manufacturing sector in India, as it questions whether royalty payments for technology should be taxed as part of the physical value of imported components.
The Core Dispute: The “Royalty Trap”
The dispute stems from a November 2025 ruling by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in Chennai.
- The Allegation: Authorities claim that between 2017 and 2020, Xiaomi undervalued its imports by excluding the 2% to 5% royalties it pays to foreign firms like Qualcomm and its own Beijing parent for intellectual property.
- The “Beneficial Owner” Tag: The tribunal ruled that even though third-party contractors (like Foxconn and Flex) physically import the parts, Xiaomi is the “beneficial owner” and must include the royalties in the “assessable value” for customs.
- Xiaomi’s Defense: Xiaomi argues that royalties are for intangible IP and are not linked to the physical import transaction. They contend that shifting tax liability from the actual importer (the contractor) to a third party (Xiaomi) “grievously injures” established manufacturing practices.
Financial Stakes: $72M could become $150M
While the base demand is $72 million, the financial risk is much higher:
- Interest & Penalties: Under Indian law, if the ruling stands, the total payout could exceed $150 million. For context, Xiaomi India’s net profit for FY2023-24 was only $31.7 million.
- Frozen Assets: This is separate from the $610 million (₹5,551 crore) in bank funds currently frozen by the Enforcement Directorate (ED) over alleged illegal remittances, which Xiaomi also denies.
A Joined Legal Front
Xiaomi isn’t fighting this alone. Its former and current contract manufacturing partners have also joined the petition in the Supreme Court:
- Bharat FIH (Foxconn)
- Flextronics Technologies (Flex)
The manufacturers argue that the tribunal’s decision treats them as mere “job workers” rather than independent principal-to-principal businesses, which could expose them to broader tax liabilities across their other clients (like Apple or Samsung).
Broader Industry Implications
Legal experts warn that a victory for the tax department could trigger a wave of audits across multiple sectors:
- Automotive & Pharma: Any industry that relies on a “license-and-assemble” model would have to re-evaluate their royalty agreements.
- Investor Sentiment: Xiaomi’s filings state the ruling reflects an “implicit mistrust of the entire contract manufacturing industry,” which could complicate India’s “Make in India” push to attract global supply chains.
Current Status
On February 23, 2026, a Supreme Court bench comprising Justice P.S. Narasimha and Justice Alok Aradhe issued a formal notice to the Customs Department. The court has asked the government to file a short note explaining its position before the next hearing.
