Whistleblower Alleges Rs 148-Crore Tax Evasion By Mobile Equipment Importers

An anonymous whistleblower letter addressed to the finance ministry alleged that mobile equipment importers evaded Rs 148 crore in customs duty on royalty charges or licence fee paid to Ericsson AB for shipping mobile handsets, tablets, dongles and data cards from China.Micromax Informatics Ltd., Xiaomi Technology India Pvt., Gionee Communication Equipment Co., Intex Technologies (India) Ltd., Best IT World (India) Pvt. negotiated with Ericsson to pay reasonable royalty on ‘standard essential’ patents after the Swedish equipment vendor in 2013 filed a plea against these companies in the Delhi High Court seeking damages for infringing its patents essential to manufacture and use mobile technologies, said the letter—a copy of which was reviewed by BloombergQuint.The court initially ordered an interim arrangement whereby the companies pay royalty ranging from 0.8-1.3% depending on the devices and their net selling price in India.The case, according to the letter to the Central Board of Indirect Taxes and Customs and Department of Revenue Intelligence, was settled out of court after telecom equipment makers signed a non-disclosure pact with Ericsson between 2013 and 2018. They paid royalty to the Swedish firm as per the agreement but skipped the payment of customs duty since 2013.Royalty payments need to be added to the assessable value of imports, as payment of royalty is a condition for sale of imported goods, the letter said. This is also stated in the customs valuation rules.Rajat Mohan, partner at tax consultancy AMRG & Associates, said current customs rules state that an importer is liable to pay customs duty on royalty and licence fee for an imported product, especially when these charges are paid based on the sale of product. For instance, royalty is paid as 1-2% of sales made by a company, he said..Ericsson is the holder of a huge portfolio of patents in 2G and 3G technologies, requiring licensee to pay royalty for the use of its patents, the letter said. The regulations of the Department of Telecommunications require all companies to adopt European Telecommunications Standards Institute and other international standards that are based on Ericsson’s patents. This helps in standardisation of equipment across the world for 2G and 3G technologies.Two government officials aware of the matter said requesting anonymity that the whistleblower letter was sent in March 2019. While the investigation agency DRI accepted the complaint, it is yet to respond. Once an investigation complaint is accepted, the agency is mandated to respond to such complaints, one of the two officials told BloombergQuint.An email to the finance ministry spokesperson seeking status of the whistleblower complaint and investigation remained unanswered. Email and calls to Balesh Kumar, director general at the DRI, didn’t elicit a response. Micromax and Gionee have yet to respond to BloombergQuint’s emailed queries. Xiaomi declined to comment. iBall could not be reached on the email id listed on its website.An Intex spokesperson said the matter relating to claim of royalty by Ericsson is challenged by Intex and is pending before the Delhi High Court. “There is no question of evasion of tax or duty, if any applicable on the patent royalty payment, as Intex has not made any royalty payment to Ericsson.”Ericsson, on a query about the allegations against these companies for not paying customs duty, said it does not comment on litigations that it is not involved in. On the agreement signed out-of-court, the Swedish company said its contents are “confidential”.According to one of the officials quoted above, if duty evasion is proven, these companies would be liable to pay interest and penalty over and above the evaded customs duty of Rs 148 crore.AMRG & Associates’ Mohan said businesses need to respect Indian laws, and the structure of taxation. Otherwise, he said, the government will have to take coercive action.

Whistleblower Alleges Rs 148-Crore Tax Evasion By Mobile Equipment Importers

The whistleblower alleges that customs duty has not been paid since 2013.

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