In a major relief for Nokia India, the Delhi High Court on Thursday lifted the freeze on the assets of its phone manufacturing facility in Chennai, paving the way for it to be transferred to Microsoft. However, the Indian entity's tax liability, should it lose the case eventually, has been shifted to Nokia Finland, which will need to submit a letter of guarantee to the high court stating it will be liable to pay the taxes. This resolution to the case was based on an offer made by Nokia Finland to the court.
The court has also asked it to deposit Rs 2,250 crore in an escrow account as an interim payment. While an offer to this effect had been made by the company earlier in lieu of lifting the freeze, it was rejected by the income tax authorities. The amount can be raised if the valuation of assets of the Chennai plant is higher. The high court’s order has cleared the uncertainty surrounding the transfer of assets — Nokia’s deal with Microsoft is valued at $7.3 billion — and also the fate of 8,000 employees.
A statement from Nokia said, “Our current understanding is that this decision allows for the transfer of the assets. However, Nokia has been asked to meet a number of conditions in the ruling, and still needs to provide the authorities with additional documentation. Nokia expects these conditions to be in line with international treaties and practices.” Nokia said it continued to expect the transaction with Microsoft to close in the first quarter of 2014.
Apart from the R2,250 crore, Nokia India will pay R700 crore, in instalments, by March 2014 as agreed upon earlier. In the event it loses the tax case, Nokia Finland will be liable to pay a demand of up to R3,500 crore, thus taking the total outgo to R6,450 crore. However, the court has said that in case a liability arises due to tax deduction at source (TDS) on Nokia Finland, it would be over and above this amount. The IT department has raised a tax demand of R5,154 crore, including interest and penalty, against Nokia Finland for not deducting TDS.
The shifting of the liability to Nokia Finland is on the basis of a clause in the double taxation avoidance agreement (DTAA) between India and Finland that provides for assistance in collection of taxes and payable by a state from a resident of another contracting state. Further, Nokia Finland was ready to furnish a letter of guarantee and in fact even submitted a draft to facilitate the sale.
“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 the sound and considered decision or even in the interest of revenue as there could be a sharp decline in the market value of the assets of Nokia India,” justices Sanjiv Khanna and Sanjeev Sachdeva said in their 36-page order.
“There would be few purchasers and invariably in such sales, proceeds are frugal. The respondents (IT department) 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 International does not take over the Indian assets,” the bench said.
Sanjeev Sabharwal, senior counsel for the income tax department, termed the order as balanced. "It is a fair order under the circumstances, which has balanced the equities and in fact have made Rs 3,500 crore repatriated as dividend to be brought back into India by Nokia Corp, in case tax liabilities of Nokia India are more than Rs 2,250 crore.”
“The question before the HC was the quantum of anticipated demand it should demand from Nokia by way of guarantee to protect the tax administration's interest. As I understand, Nokia in its pleadings before the HC had offered the initial amount of 2,250 crore as security and I wonder what was the tax administration's wisdom to seek sums in multiples of the amount by adding penalties and double disallowance. The administration by doing so lost an opportunity to build goodwill with an ambassador of India who has been an early investor,” said Mukesh Butani, managing partner, BMR Legal.
Thursday's order pertains to only the lifting of the freeze on the factory to help materialise the sale. The case relating to the legality of the tax claim by the income tax authority will carry on separately. In case Nokia loses out, the liability could stretch between Rs 6,450 crore and Rs 21,000 crore if fines and interest are taken into account along with existing and future liabilities.
The income tax department has claimed tax from Nokia India for royalty payments made to the parent Finnish firm for five fiscal years since 2006-07. The demand of Rs 2,080 crore was served on the company in March this year. However, the claim by the director general of international taxation rose to Rs 10,569 crore once the future liabilities were also taken into account. This could, however, come down to Rs 8,657 crore if Nokia India chooses to pay tax on the royalty as this payment would then be recognised as an expenditure while calculating the tax liability on the company, IT officials explained.
Separately, the chief commissioner of income tax (CCIT) has raised a tax demand of Rs 10,584 crore based on the assumption that Nokia's Indian operations from a special economic zone in Chennai is not eligible for the tax holiday available to such units. Assessment of whether that indeed is the case, however, is yet to be made by the income tax department. In case the company is found to be eligible for the five-year full income tax holiday and another five years of partial tax holiday, the CCIT's tax demand could fall nearly by half to Rs 5,543.
Taking into account both scenarios, the total tax outgo on Nokia would be Rs 14,200 crore, income tax officials told FE.
However, the court has not commented on the the various calculations made by the revenue department at this stage as it may prejudice the case.