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Experts from KPMG and others advise Nokia to settle tax row amicably
March, 18th 2014

Conciliation, and not aggression, is the feasible option for Nokia to resolve its incometax dispute in India in time to transfer the company's phone manufacturing facility in Chennai to Microsoft as part of their global deal, say local tax and legal experts.

"I think Nokia should listen to the Supreme Court's advice. Rather than a standoff, it's better to settle the matter amicably," said Dinesh Kanabar, deputy chief executive at KPMG India. "If the parties agree to see reason and negotiate, there could be a speedy resolution to the dispute."

On Friday, the Supreme Court dismissed Nokia India's appeal against a Delhi High Court order directing the company's parent, Nokia Finland, to give a Rs 3,500-crore letter of guarantee covering the Indian unit's potential tax liabilities. Nokia has claimed that the order implied that the letter of guarantee could be cashed in whenever the tax authorities raised a demand, leaving the company without the opportunity to dispute any claim.
Taxing Times The company has already agreed to another high court condition to deposit Rs 2,250 crore in an escrow account, covering the tax amount the authorities had initially demanded. This and the letter of guarantee were among the main conditions set by the high court for allowing transfer of the handset maker's plant in Chennai to Microsoft.

The factory's transfer forms a part of Microsoft's agreement to buy Nokia's devices business for about $7.2 billion. If the plant isn't transferred, Nokia could run it as a contract manufacturer for Microsoft for a limited period, which could eventually leave about 30,000 employees, including contract workers, out of work, Nokia has said in court. While the global deal could still go ahead, it would leave Nokia with less money and Microsoft without a crucial manufacturing plant — among Nokia's biggest.

The case is among the high-profile tax disputes in India involving overseas companies which are being closely watched by foreign investors. The other notable case involves UK's Vodafone Group.

Nokia should "pursue openminded negotiations appreciating the position that the tax department is justified in withholding the approval for the transfer of its assets", said Daksha Baxi, executive director at law firm Khaitan & Co. "This will give comfort to the tax authorities, something that they have been seeking as per law." Other options like a curative petition requesting the Supreme Court to reconsider its ruling or invoking the bilateral investment treaty between India and Finland won't be of much use, experts say.

Baxi said while the most the apex court may do is reducing the guarantee amount, it is unlikely to overturn the high court order until the case is decided on its merit, as it had happened in case of Vodafone. Kanabar, the KPMG executive, agrees with this view.

Baxi doesn't see any case for invoking a bilateral treaty since there is no order of any authority to confiscate the assets.

on Sunday reiterated the company is still considering "its next steps", but didn't elaborate. Asking the government and Nokia to sort out the matter, Supreme Court Justices Anil R Dave and Shiva Kirti Singh said: "Find some way out, work out a tripartite agreement."

At the heart of the matter is a finance ministry notice last March, asking the Helsinki-based company to pay Rs 2,080 crore after the income-tax department said the company evaded taxes on software downloaded on handsets manufactured at the unit in Sriperumbudur, Chennai, since 2006. The plant generated revenue of more than Rs 1.51 lakh crore between 2006-07 and 2012-13, India has said.

Fearing that Nokia may wind up its local operations after the Microsoft transaction without paying the tax — which has risen to more than Rs 15,000 crore, including penalties and interest, according to authorities — the income-tax department had frozen the Chennai factory within days of the deal being announced last September. According to the tax department, it did so because Nokia India had paid its parent Rs 3,500 crore as dividend, which will leave the company without adequate assets to pay up the tax it had demanded.

Soon after, the Delhi High Court put an interim stay on Nokia India transferring the ownership rights for any of its immovable assets and asked the company to inform the tax assessing officer before sending back money overseas. Nokia then approached the court to lift the freeze on the assets such that the sale can go through, saying it was willing set aside Rs 2,250 crore in an escrow account.

The high court agreed, saying that Nokia should deposit the amount in an escrow account. In addition, the Finnish parent should give a letter of guarantee for Rs 3,500 crore — the amount Nokia India had transferred to its parent as dividend — that would cover any potential tax liability once the merits of the case are decided, the court said.

"If Nokia does not give the guarantee and it eventually loses the case on merit, the tax authorities would have a challenge to collect the tax demanded since the assets of Nokia India would have already been transferred," Baxi said, adding that the tax department is within its legal rights to stop the transfer of assets to protect its tax demand. Kanabar though said the tax computation seemed "very aggressive" and there is room for the tax department to reduce it during negotiations with Nokia.

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