Nokia: is amicable settlement the way out?

Mar 20 2014, 02:54 IST
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SummaryThe apex court has suggested that the government and Nokia sort out the tax dispute by working out a tripartite agreement to end the stand-off

The Supreme Court last week dealt a blow to Nokia by rejecting its appeal against the Delhi High Courtís December 12 order regarding the transfer of the companyís assets to US software giant Microsoft.

In this high-profile tax dispute case which is being closely watched by foreign investors, the HC had imposed 16 conditions including the one asking the companyís parent, Nokia Finland, to furnish a R3,500-crore letter of guarantee covering the Indian unitís potential tax liabilities. Besides, the other main condition for allowing transfer of the handset makerís plant in Chennai to Microsoft was to deposit R2,250 crore in an escrow account, covering the initial tax liability demanded by the revenue authorities.

The transfer of the Sriperumbudur plant is integral to the handset makerís $7.2 billion impending global deal announced in September last year. The India deal is stuck in the tax claims relating to alleged violation of withholding tax norms by Nokia India since 2006 while making royalty payments to its Finnish parent, which amount to R21,000 crore (the actual tax demand is around R10,149 crore) for 2006-13, including penalties.

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.

What probably weighed heavy in the minds of the apex court judges was Nokiaís reluctance to furnish the valuation report in relation to its Chennai plant. An internal report, prepared overnight under pressure from the apex court, estimated the value of Chennai plant at R2,432 crore and the same was rejected in seconds for not being authentic. Even the company has been non-committal in how to secure the departmentís interests.

Nokia told the apex court that if the plant isnít transferred, the handset maker could run it as a contract manufacturer for Microsoft for a limited period before winding it up, but this could leave about 30,000 employees, including contract workers, jobless.

However, this looks unlikely as Microsoft would not like to let go of Nokiaís biggest phone-making factories, which employ around 8,000 people and generated revenue of more than R1.51 lakh crore between 2006-13.

Nokia Finland had only made a small investment of R35 crore but gained significantly from the profitable Indian market since the start of business in 1996.

It is apparent that doing business in India has

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