A pickup truck police thought was suspicious, with some 12 men onboard, was stopped by the officers near a checkpoint on the Kew Satai-Mae Chan Road in Tambon Pa Tueng just after midnight.
The truck reportedly tried to flee and police said the men opened fire at them, leading to a five-minute gunfight.
One suspect was injured and arrested along with 120,000 yaba tablets, while 11 others managed to flee.
The wounded, later identified as Lahu hill-tribal man Jala Jalo,26, told authorities they were delivering 11 sacks of yaba to a customer in Chiang Mai's Mae Ai district and were about to travel on foot to avoid the checkpoint's detection when they were stopped.
Mae Chan Police later recovered another 840,000 yaba tablets in seven sacks in an abyss two kilometres from the gunfight scene.