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Nokia takes step towards arbitration in India tax dispute
May, 14th 2014

Finland's Nokia has taken an initial step towards seeking international arbitration to resolve the multi-million dollar tax disputes related to its manufacturing plant in Chennai, sending a letter to the Prime Minister under the bilateral treaty between the two countries.

"Nokia is keen to work with authorities in India to resolve the tax disputes. As one of our actions, Nokia has sent a letter under Finland India Bilateral Investment Treaty (BIT) to the Hon'ble Prime Minister of India. The letter seeks for amicable resolution of the current tax disputes," a Nokia spokesperson said.

Another person familiar with the matter said that Nokia could serve a formal notice of arbitration within three months of sending the initial letter. It's not clear when the initial letter was sent to New Delhi.

This tax dispute is the latest in a slew of similar issues which the country's new government will have to deal with when it assumes office likely by the end of this month.

Nokia had to leave the Chennai plant out of its $7.5 billion global sale of its devices business to Microsoft that closed April-end after India's tax authorities seized the facility late last year, claiming that the Helsinki-based company had evaded taxes on software downloaded on handsets manufactured at the unit since 2006. Central tax authorities had raised an initial demand of Rs 2080 crore, which Nokia has contested legally.

Nokia India had offered to put Rs 2,250 crore in an escrow account, and has already paid Rs 700 crore separately to free up the plant. It also agreed to furnish a Rs 3,500-crore bank guarantee covering the amount it had transferred to its parent as dividend, as directed by the Delhi High Court. But it opposed another condition to furnish another bank guarantee from the parent covering unspecified potential future tax liabilities and appealed against it in the Supreme Court, which upheld the HC order in March, leaving the issue unresolved.

The plant, with nearly now operates as an export-oriented unit producing mobile devices for Microsoft, even as Nokia attempts to resolve the issue with the Indian government.

The situation has however worsened after the Tamil Nadu government slapped an additional Rs 2,400 crore notice, alleging that the company avoided paying taxes on devices sold within India by masking them as exports. The Madras High Court has asked Nokia to deposit 10% of the disputed tax demand by June -end, as a precondition for the two sides to discuss the claims afresh.

Nokia's move comes close on the heels of Reliance Industries Limited sending an arbitration notice to the government on the issue of pricing of gas from the Krishna-Godavari basin, mounting troubles for the new government which would have to face Vodafone Plc in a separate high-profile tax issue.

Vodafone Plc has sought that the government appoint an arbitration panel as per the India-Netherlands bilateral investment promotion and protection agreement, after conciliatory efforts on between the two since June 2013, failed to resolve the Rs 20,000-crore tax dispute - related to the $11 billion payment made by Vodafone to Hutchison Telecommunications International for the 2007 acquisition of Hutchison Essar (now called Vodafone India).

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