Nokia: is amicable settlement the way out

Written by Indu Bhan | Indu Bhan | Updated: Mar 20 2014, 08:24am hrs
The Supreme Court last week dealt a blow to Nokia by rejecting its appeal against the Delhi High Courts December 12 order regarding the transfer of the companys 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 companys parent, Nokia Finland, to furnish a R3,500-crore letter of guarantee covering the Indian units potential tax liabilities. Besides, the other main condition for allowing transfer of the handset makers 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 makers $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 Nokias 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 departments interests.

Nokia told the apex court that if the plant isnt 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 Nokias 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 been extremely profitable and beneficial for Nokia Finland who have received a dividend of R3,500 crore in the current financial year.

The total quantum of purchases including raw material purchases from Nokia Finland and their associated enterprises is about R57,924.48 crore. In comparison, Nokia Finland had paid a paltry income tax of about R71 crore during 1997-08. After 2008-09, no tax has been paid in India by Nokia Finland.

Closing down or keeping out Nokia India, when Nokia Finland is globally transferring and disposing of their hand devices/mobile phones business, may not be a sound and considered decision or even in the interest of the revenue department as there could be sharp decline in the market value of the assets of Nokia India. There would be few purchasers and invariably in such sales proceeds are frugal the HC had also noted.

Even the Indian tax authorities are on a stronger wicket as Section 115 A of the Income-tax Act 1961 obliges an Indian resident to deduct a 10% tax from royalty payments to a foreign company.

So, what are the options today

The deal in India now hinges on the Finland-based handset makers willingness to agree to both the HC conditions.

Even experts feel that amicable settlement through negotiations is the best way for speedy transfer of the Chennai plant. The apex court has also suggested that the government and Nokia sort out the matter by working out a tripartite agreement to end the stand-off.