Nokia India is involved in a tax dispute with the Income Tax Department. The tax department has alleged that Nokia has failed to withhold tax on payments made for downloading of mobile telephone software from Nokia overseas at its Chennai facility and uploading/insertion of such software in the mobile phones manufactured from the facility.
The tax department has claimed such payments are royalties and the issue amounts to tax withholding. In the absence of a confirmed assessment by the tax department for all the tax years involved in the controversy (from 2006-07 to 2012), the tax amount including penalties and interest is expected to be Rs 6,500 crore to Rs 21,000 crore (around $3.5 billion).
Following a search and seizure operations, Nokia’s Chennai plant assets are frozen by the tax department and consequently global sale of mobile phone equipment from Nokia to Microsoft has been jeopardised as far as the Indian leg of the transaction is concerned.
Court’s ruling
Core tax dispute in relation to classification of payment as royalties and consequent tax withholding obligation is pending for resolution. However, providing a critical relief, Delhi High Court has ordered unfreezing of the assets at Chennai plant permitting the sale to Microsoft to go through. In order to protect the interest of revenue, Delhi High Court has imposed certain conditions on the taxpayer.
Delhi High Court has directed Nokia to pay an interim deposit of Rs 2,250 crore into an escrow account.
Delhi High Court has observed that Nokia India directly employed 8,000 workers and it is indirectly providing employment to another 2,5000 persons. Their employment is at stake and this fact cannot be ignored. Neither can we ignore the fact that Nokia India had repatriated Rs 3,500 crore, though they were aware that there was a dispute and would-be claims of the Income Tax Department. As of now, the tax demand or issues are inchoate and it may take a considerable time before the issue is finally settled. Possibly, the dispute will be taken to the Supreme Court for final adjudication and this is a time consuming process. The final outcome is uncertain. Even if the matter is decided against Nokia India/Nokia Finland, the quantum of demand itself depend upon several factors. Closing down or keeping out Nokia India, when Nokia Finland is globally transferring and disposing of its hand devices/mobile phones business, may not be a sound decision or even in the interest of revenue as there could be sharp decline in the market value of the assets of Nokia India. There would be a few purchasers and invariably in such sales, proceeds are frugal. The respondents themselves are not sure of the market value of the assets and have not undertaken any calculation or examined what will be the consequences in case Microsoft does not take over the Indian assets.
Nokia Finland will be bound by the statement that it shall be jointly liable and shall pay tax demand determined and payable in respect of tax withholding default, interest and penalty thereon. A higher amount of tax will need to be deposited in case the value of assets under sale exceeds the base amount.
Core tax dispute and the tax demand case will continue. Nokia has also been asked to submit a letter of guarantee that it will comply with the court's order.
Wherever feasible, Delhi High Court has ordered Nokia Corporation Finland as well as Nokia India to be jointly responsible for payment of income tax. However, Microsoft (as the buyer of Chennai assets) will not be responsible for any tax liability. Nokia and tax department are free to reach a mutual agreement procedure on the tax dispute and if required approach the Delhi Court again. The Income Tax Department can approach the Delhi High Court again in case if Nokia defaults in future tax payments.
Delhi High Court has weighed in balance of convenience and carefully calibrated and balanced interest of both the taxpayer and the tax department. The foreign parent of the Indian taxpayer has been made liable to pay tax and provide future commitments. It is one of the rare occasion where such steps have been taken. Enforcement of liability against a foreign company is a key international law issue.
(Sunil Jain is Partner with JSA Associates.)
To become a guest contributor with VCCircle, write to shrija@vccircle.com.