New Delhi, Dec. 12: Nokia has won an appeal to release a local factory seized by authorities in a tax dispute, allowing the transfer of the plant as part of the sale of its mobile phone business to Microsoft.
The plant in Chennai is one of Nokia’s biggest phone-making factories. Nokia had appealed its seizure and was trying to resolve the dispute ahead of the closure of the 5.4-billion-euro Microsoft deal.
Nokia had wanted the asset freeze to be lifted by December 12 to enable the transfer of ownership to Microsoft.
A bench of justices Sanjiv Khanna and Sanjeev Sachdeva of the Delhi high court said “we permit and allow sale of assets by Nokia India to Microsoft/Microsoft International”.
But the tax dispute is still ongoing and if Nokia loses the case, it may have to pay as much as $3.4 billion, including penalties for the non-payment of tax and interest, according to a tax department lawyer.
The court has asked the Finnish company to deposit Rs 2,250 crore in an escrow account as a condition for lifting the freeze and transferring the facility to Microsoft.
However, the deposit amount may rise if the assets are valued higher. Nokia has also been asked to submit a letter of guarantee stating that it will comply with the court's order.
“Nokia Finland will be bound by the statement that they shall be jointly liable (with Nokia India) and shall pay tax demand determined and payable under Section 201/201(1A), interest and penalty thereon,” the bench said.
The court, however, categorically stated that Microsoft would not be responsible for any tax liability.
In an e-mailed statement, Nokia said, “Our current understanding is that this decision allows for the transfer of the assets. However, Nokia has been asked to meet a number of conditions in the ruling, and still needs to provide the authorities with additional documentation. Nokia expects these conditions to be in line with international treaties and practices.”
The Finnish firm added that it “will now start to prepare for planned transfer of assets, but notes that there are still a number of statutory clearances that remain before the assets can (be) transfer(ed)”.
The giant mobile phone maker said it “continues to expect the transaction with Microsoft to close in the first quarter of 2014” and “repeats its call for the Indian government to work with urgency to facilitate the other approvals needed for the transfer.”
An extended asset freeze as a result of the dispute would have blocked Nokia from transferring the ownership of the Chennai plant, possibly forcing it to operate as a subcontractor of Microsoft.
“There was the question, if Nokia couldn’t sell this factory what should it do? Should they sell it later or should they be a subcontractor? This was some kind of uncertainty,” said Pohjola Markets analyst Hannu Rauhala. “But of course, we still don’t know how much Nokia has to pay.”
“It’s a very fair and balanced order,” said N.P. Sahni, a lawyer for the tax department. “It substantially protects the interest of the revenue (department) and also enables Nokia to go ahead with its proposed deal with Microsoft.”
In March, Nokia was served with a tax demand for about Rs 2,080 crore covering five fiscal years starting from 2006-07, according to a notice on the Delhi high court website.
Including the anticipated liability, or the tax bill for the years that have not been assessed by the authorities, the total liability could be roughly Rs 7,500 crore, Mohan Parasaran, a lawyer representing the tax department, said on Wednesday.
If Nokia loses the legal battle, its liability could total Rs 21000 crore, which includes penalties and interest, Parasaran said. He declined to give additional details.
Nokia shares, which had fallen over 2 per cent earlier in the day on uncertainty about the case’s outcome, were flat by 1145 GMT. They have risen over 90 per cent since the Microsoft deal was announced in early September.
Nokia’s case is one of several high-profile tax disputes involving foreign companies in India, which has stepped up its pursuit of claims against such firms as it seeks to rein in its budget deficit.
Other foreign firms recently involved in tax disputes in India include IBM, Royal Dutch Shell, Vodafone and LG Electronics Inc.