Nokia tax battle may find a diplomatic truce

Government offers out-of-court settlement; may opt for imposing penalty

The Rs 2,000-crore Nokia tax issue might be heading for a diplomatic solution, with the government readying for an out-of-court settlement. It is considering the idea of imposing a penalty on Nokia, rather than asking it to pay up pending taxes it supposedly owes here.

The Finnish government has taken up the matter at a diplomatic level with the Indian embassy in Helsinki, indicating the dispute could risk Finnish investments in India.

There are about 120 Finnish companies present in India, either through their subsidiaries, joint ventures or representative offices. The total investments by Finland in India stand at $1.4 billion.

The external affairs ministry is spearheading the matter with the finance ministry through its mission there by working out a mechanism under the Bilateral Investment Promotion and Protection Agreement (Bipa) that India has with that country. Bipa with Finland had come into force in April 2003.

“We have told them (the finance ministry) to look into the issue. We have given Nokia the option to either fight it out in court or pay a penalty for not paying the required taxes. If the matter can be settled out of court, why not try it?” a top external affairs ministry official asked.

The official told Business Standard the ministry had asked the finance ministry to hasten the process as “these issues do deter investments”. India and Finland also have a Double Taxation Avoidance Agreement (DTAA), under which the finance ministry is trying to work out a solution through the mutual procedure agreement provision under the extant treaty.

When contacted, Poonam Kaul, director of communications at Nokia India, said the company was not in a position to comment on any development.

Earlier, Nokia had said its operations were “fully aligned with domestic and international tax rules, as well as the bilaterally-negotiated tax treaty between the governments of India and Finland. Nokia will defend itself vigorously. Given that this case is ongoing, the company will not comment further at this stage”.

Nokia has two manufacturing units here - in Sriperumbudur and Kolkata. In March this year, the handset maker was issued a notice by the income-tax department, demanding payment of taxes for a period of six years starting from 2006-07.

The department had asked Nokia India to pay around Rs 2,000 crore over evasion of tax on its royalty payment to Finland-based parent Nokia Oyj for downloading software on the mobile devices manufactured at its Sriperumbudur facility since 2006. Royalty paid for downloading software attracts 10 per cent tax deducted at source (TDS).

Nokia had challenged the matter in the Delhi High Court, which handed over the case to the appeals division of I-T authorities. However, in May, Commissioner of Income-Tax (Appeals) dismissed the challenge. Nokia then said it would take the case back to the HC.

The company was also accused of flouting transfer-pricing rules by the I-T department but the penalty estimates have not yet been notified. Nevertheless, the total amount Nokia India could be asked to pay up — if both parties do not arrive at a solution — could be around Rs 12,000 crore, according to another official who did not wish to be named.

Last month, the issue was also taken up by Commerce Minister Anand Sharma with Finnish Foreign Affairs Minister Jan Vapaavuori and Trade Minister Alexander Stubb during his visit there.
TAXING CALL

ISSUE

• Rs 2,000 cr The amount I-T had asked Nokia India to pay over evasion of tax on its royalty payment to Finnish parent for downloading software on mobile devices manufactured at the Sriperumbudur facility
• Rs 12,000 cr The total amount Nokia might be asked to pay if the two sides fail to reach an amicable settlement

AT STAKE

• $1.4 bn Investments by Finnish companies in India
• 120 Finnish companies present in India, either through subsidiaries, JVs or representative offices