Legal experts said scrutiny of royalty payments could force global smartphone companies, including Chinese firms, to reconsider their agreements with patent holders to include clauses for regional subsidiaries to pay their share to avoid any investigation by Indian authorities.
They say the investigation of Xiaomi India’s enforcement directorate Payment of fees It has greater ramifications for outside companies including Chinese competitors, which creates an uncertain environment, and could harm the larger electronics manufacturing ecosystem.
The ED called Xiaomi India’s royalty payments illegal and a violation of the Foreign Exchange Management Act (FEMA), saying it is registered as a distributor and therefore should not pay royalties, especially since such agreements are between the Chinese company. The father and the owner of the innocence. ED then froze the company’s banking assets worth more than Rs 5,500 crore, which Xiaomi India has challenged it in court. The matter has been reserved by the Karnataka High Court.
Legal experts speaking to ET said that Chinese companies will need to review licensing agreements, upon concerns of an imminent investigation, and ensure they are comprehensive and expressly contain clauses addressing the terms and conditions of royalty payments, and provide descriptions of intangible assets and accrued benefits.
“Whether royalty is included in the import/sales price, parent company owner details are included, etc. Also, proper valuation reports and justifications are required, and even more so if the remittances are more than they are in line with the standard account,” said Vikrant Singh. Neji, Partner, DSK Legal.
Vivo India has also been accused by iOS of money laundering, alleging that more than 50% of its sales were diverted to China to avoid paying taxes in India. Oppo was also charged by the Revenue Intelligence Directorate for evading customs duties to the tune of Rs 4,389 crore.
All three companies have denied any wrongdoing. Vivo And Xiaomi also dragged ED to court.
Scrutiny around royalty payments by government agencies could have a greater impact on the patent licensing ecosystem, which serves as a backbone for regional subsidiaries to build their products from contract manufacturers using standard core patents under globally signed licenses, legal experts said.
“These are global players,” said Yogesh Pai, associate professor at the National University of Law. “In most of these cases, these are global patent licensing agreements. It’s not region or region specific.
Another legal expert in Delhi said it was entirely possible that global licensing agreements would have included provisions to require regional branches to pay their share of the royalties off their books.
Subhash Puturia, Partner at DSK LegalIt is also legally possible to have separate intellectual property licensing agreements for parent companies and subsidiaries, he said.
“This (scrutiny of royalty payments) affects the whole patent licensing ecosystem. Not only for the manufacturing industry in India, but for the patent owners as well, who will not be able to collect royalties from an important market like India. Especially where manufacturing is involved,” said another lawyer at Delhi IPR: “Export is meant to become a big base, with PLI plan.”
The agreements were made to accommodate the fact that one could do the fabrication yourself, or have others do it. Under the new logistics structure around the world, brands do not manufacture themselves, but rely on OEMs for it. He said that from the perspective of ease of doing business, it is certainly a big problem for Chinese brands.
“Everyone will go back to how they run their businesses. They’ll be very serious about complying with the laws of the land, which every company does. But giving that signal that there’s some kind of government scrutiny going on, that could be counterintuitive,” said Tarun Pathak, research director at Counterpoint Research. To some extent to the fact that India wants to attract more investors for industrialization.
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