Nokia takes tax feud to Supreme Court, contesting fresh rules set by HC
February, 13th 2014
Nokia appealed to the Supreme Court for relief on Wednesday with the Delhi High Court having imposed new conditions stalling the transfer of its plant in Chennai to Microsoft as part of a global acquisition and putting at risk the jobs of 30,000 people at the handset factory.
The predicament of the Finnish company, which is in the process of selling its handset business to Microsoft reflects the sudden return of uncertainty over India's reliability as an investment destination.
The development comes a day after it was revealed that talks between Britain's Vodafone Group and the government on a long-running tax dispute may be on the verge of collapse, which may make foreign investors leery of putting their money in the country.
'Change in rules irrational'
Nokia's chairman and interim CEO Risto Siilasmaa said the company was trying its best to ensure that it keeps the plant running. "If we are not allowed to transfer (the unit to Micosoft), we will have a factory, but we will not have a business.
And if we don't have a business, we can't manufacture anything in the factory. And that would be detrimental to our employees and we care deeply for our employees.
So we are trying to explore all possible means of finding a solution to this issue," Siilasmaa said. A Nokia global spokesperson said changes imposed by the court would be detrimental to India's standing.
"The use of such a practice against international standards can poison the investment climate and endanger jobs. We cannot agree to such an undertaking. We will continue to defend ourselves vigorously against any arbitrary tax demand and collection attempts of the tax authorities," he said.
In December last year, the Delhi High Court had given the go-ahead for the transfer of Nokia's manufacturing plant in Chennai to Microsoft as part of a global $7.2-billion deal, on condition that the company's India unit paid Rs 2,250 crore to the government as a guarantee.
However, in an order last week, the high court imposed extra conditions under which the guarantee would kick in whenever the tax authorities raise a demand, leaving the company without the opportunity to dispute any claim.
"The court has created greater uncertainty over this possibility by imposing these new conditions, based on the request of the income-tax authorities, which go against the spirit of its December 12 ruling and come only weeks before the expected closing of the global transaction with Microsoft in Q1 2014," Nokia said in a statement.
Separately, the Nokia global spokesperson quoted above said the change in rules was irrational. "We are left without having the right to use the legal remedies to defend ourselves against those claims. We cannot agree to waive those rights, particularly in the situation where the actions have been arbitrary."
The company, which has just about managed to stabilise its tumbling market share in India's smartphone segment, said that the country's tax demand had moved from "reasonable to unreasonable".
Nokia has asked for a quick hearing of its appeal but it is unclear when the apex court will do so.
Siilasmaa met commerce and industry minister Anand Sharma to convince Indian authorities to allow the manufacturing plant's transfer. "Nokia raised the tax-related concerns as they transition to Microsoft. I will be taking up their concerns with the finance ministry, since it is their domain," Sharma said after his meeting with Siilasmaa.
The latest developments in the Nokia case are unsettling and would be a cause for concern to foreign companies investing in India, said Dinesh Kanabar, deputy CEO, KPMG India. He said that while the tax department is entitled to make sure that a company doesn't have tax liabilities, it may be over-reaching.
"The Delhi High Court provided an overall framework for transfer. We now have tax authorities asking for undertakings which could result in jeopardising the entire transaction. We will not send out a positive message to the international investing community by our actions," he said.
"In the process, are we disregarding the fact that employment of thousands of people is at stake?" he asked. The finance ministry had in March 2013 asked the Helsinkibased company to pay Rs 2,080 crore after the Income-Tax Department said it evaded taxes on software downloaded on handsets manufactured in Nokia's manufacturing facility in Sriperumbudur, Chennai, since 2006. The Chennai plant is one of Nokia's biggest phone-making factories, with revenue of more than Rs 150,700 crore from 2006-07 to 2012-13. As part of the Microsoft-Nokia deal announced in September 2013, the Chennai factory had to be transferred to the US company, failing which the Finnish firm would have had to find another buyer for the unit, run it as a contract manufacturer for Microsoft or shut it.
The income-tax authorities had frozen the Chennai factory within days of the deal being announced. The tax department has claimed dues of Rs 21,000 crore, which includes penalties for non-payment of tax and interest. The Nokia spokesperson said the company had heard of different claims from the tax authorities but it has been served with just one which was spelled out by the high court in December.