The income tax (I-T) department is readying to issue a demand of Rs 2,100 crore against mobile handset giant Nokia. The commissioner for appeals dismissed the company's plea that the payment made by the Indian arm to the Finnish company was not royalty. Nokia had challenged the demand in Delhi high court and said the goods used were for components and should be treated as raw material.

The commissioner appeals, however, found merit in the tax department's argument, paving the way for a demand letter. While asking the commissioner appeals to issue an order by May 31, the HC had asked the department not to raise a demand for at least seven days. In addition, it has refrained the department from undertaking any coercive measures.

Nokia said it was disappointed with the order and will examine all options to defend itself vigorously in this case and against any other Indian tax allegations. "Nokia is disappointed by the decision of the Commissioner of Income-tax (Appeals), and will now examine all options open to it. These include taking the case back to the Delhi high court," the company said in a statement.

"In addition to the legal action Nokia is taking in India, it is worth remembering that the ministry of finance in Finland has launched the Mutual Agreement Procedure with its counterpart in India under the bilateral Double Taxation Avoidance Agreement to reach a common understanding on the matter. Nokia will act quickly and decisively to protect its interests," the company said.

Sources said Nokia has the option of moving the Income Tax Appellate Tribunal (ITAT). The ITAT is likely to admit its stay petition but may ask the Finnish company to make an interim payment of 30% of tax. Sources say this is normal course of action that is generally followed by the ITAT. Department sources say, they would wait for the next one week and then move to raise a fresh demand.

The initial demand notice was served after surveys conducted by tax officials earlier this year. Tax officials had said they collected "documentary" and corroborative" evidence before issuing the notice. Nokia had protested saying it was in full compliance with Indian laws as well as the bilaterally negotiated tax treaty between India and Finland.

Several multinational companies have come under the scanner of Indian tax authorities in recent months. Tax officials say they have a watertight case against most companies and have vowed to vigorously pursue the investigations to net taxes due to the authorities. Vodafone, Cadbury, Royal Dutch Shell and LG Electronics are some of the top MNCs, which have come under the watch of the tax department. India is a key market for Nokia and the company has recently expanded its Asha range of smartphones and the Lumia series in India.