India's Rs 21,000-crore tax dispute with Finnish handset maker Nokia seems to be becoming a complex legal issue, like an earlier one with telecom firm Vodafone. The government is planning to tell Nokia that the matter cannot be resolved under a bilateral investment promotion and protection agreement (Bippa) with Finland, which does not cover taxes.
In its reply to the Finnish telecom company's letter invoking the dispute settlement clause in the treaty, India will also say international arbitration is only possible after all appeals - to the income-tax commissioner, appellate tribunal, high court and Supreme Court - are exhausted.
"Our reply is under process. We will say the India-Finland Bippa does not talk about tax issues. We will also tell them that the understanding under the Bippa is arbitration is the last resort. There are so many legal channels available to Nokia," said a finance ministry official who did not wish to be named.
Nokia's plea against the income-tax department's notice for the company's failure to withhold taxes on royalty paid to its parent was dismissed by the commissioner of income tax in June 2013. The company moved the income-tax appellate tribunal and its appeal is pending there.
"Nokia continues to explore all possible options to find a quick and amicable resolution to the ongoing tax disputes in India," a spokesperson for the company said in response to an emailed query.
Vodafone had also sought arbitration under the India-Netherlands investment treaty in its Rs 20,000-crore tax case, but that was the British telecom company's last resort, as it had won the case in the Supreme Court before the government retrospectively amended the Income-Tax Act.
THE STORY SO FAR
Nokia's case is different from that of Vodafone on another count as well. India's treaty with the Netherlands specifically says tax issues are not covered, but the treaty with Finland is silent on taxation.
In a letter to the Indian government in April, Nokia had argued the tax department was indirectly expropriating the company's money, which affected its net worth and return on investment. These issues are covered in the investment treaty.
"Expropriation has a meaning. The company has interpreted the law indirectly… There is a clause in the India-Finland Bippa, which in a way means tax issues are not covered," the official added.
On a request from the Finnish government last year, India had begun work on resolving the dispute under a double-taxation avoidance agreement. These talks are now stuck because Nokia is "not agreeing to the facts of the case presented" by India. "There is disagreement over certain issues. We found the information about tax evasion in a survey. Nokia did not declare it on its own," said another official.
Nokia was in a hurry to settle the tax dispute because of its $7.2-billion deal with Microsoft. The dispute led to Nokia's Chennai plant, one of its biggest phone-making factories, being left out of the deal.
In March 2013, tax authorities had served a notice on Nokia for wrongfully claiming exemption on royalty payments made against supply of software by the company's parent firm for five years starting 2006-07. The first notice was for Rs 2,000 crore. But, according to tax officials, the total demand, including past years' arrears, would go up to Rs 12,000 crore. Besides, the interest component will take the dues to Rs 21,000 crore. The tax department can also levy a penalty of 100-300 per cent of the total tax due.
India has till next month to give its reply. The treaty says if a dispute between the country and the investor cannot be settled amicably within three months, the investor can approach local courts or seek international conciliation.