NEW DELHI: An industry association representing companies like Apple and Xiaomi has written to the government about Enforcement Directorate’s (ED) recent actions against smartphone brands’ royalty payments on intellectual property, saying the move has sent “shivers through the industry”.
India Cellular and Electronics Association (ICEA), in a letter to finance minister Nirmala Sitharaman, commerce minister Piyush Goyal and IT minister Ashwini Vaishnaw dated May 30, blamed recent ED action against handset brands for alleged violation of foreign exchange rules on the agency’s “lack of understanding the process of royalty payments to patent holders”.
The agency, after interrogating senior Xiaomi India executives in April, had passed an order freezing the company’s bank assets worth over Rs 5,500 crore for allegedly parking money out of the country under the guise of royalties in violation of the Foreign Exchange Management Act (FEMA).
The action has since been stayed by the Karnataka High Court, on Xiaomi’s appeal, till the next hearing on Wednesday.
ICEA has sought intervention of the ministers to give clarity to the enforcement agencies, since “there is deep and unnecessary panic in the industry around the agencies’ actions with respect to royalty payments”.
The letter claimed that a case is being built by ED against royalty payments, which is duly acknowledged by Indian law. “Patent implementers are doubly embattled, paying onerous royalty on one side, and facing and fearing enforcement actions on the action,” it said.
Companies paying royalties for intellectual properties (IPs) used in India is not illegal and not prohibited by any Indian law or regulation, ICEA said, adding it is a common practice adopted by many companies that implement SEPs (standard essential patents) or other patents – something that Xiaomi has also claimed in its court filings.
The ICEA letter also alleged that companies like Nokia, Ericsson, and Qualcomm have developed a business model of demanding royalties on their intellectual property rights (IPRs) and have engaged in litigating companies to coerce them to sign licensing agreements.
Considering this inescapable ground reality, ICEA said, smartphone brands would not have been able to use mobile technology without these royalty payments, and that “smartphones sold in India would be nothing more than toys”.
If the royalties were not paid, these companies would have been sued by these global legacy patent holders, it said.
The letter reminded that both Indian and international smartphone companies have been “scarred” by these lawsuits in the past, which led to seized consignments, factories in lockdown, and numerous injunctions. This would also have a potential impact on the ‘Make in India’ programme, which the letter said, has been pioneered by the smartphone industry.
ICEA said patent holders like Qualcomm charge royalty on the invoice price of the complete device, and not just on the component on which the technology resides, causing a detrimental impact on innovation in India by creating an insurmountable roadblock to Indian developers and the startup ecosystem.
In the writ petition filed by Xiaomi in the Karnataka High Court, the company said 84% of the royalties which the ED has deemed illegal, has been paid to two subsidiaries of Qualcomm, which is incorporated in the United States.
Xiaomi clarified that it has been paying royalties since 2015, and has been considered a value addition by the income-tax department. The company told the court that its business in India has been disrupted by the ED order.
The High Court has allowed said Xiaomi to avail bank overdraft to carry on day-to-day activities and pay for imports of items essential to its business, with the exception of royalty payments till further hearing.