Business Standard

Nokia tax judgment: Court acts as Solomon

Kumkum Sen 

2013 was a year of disappointments insofar as reforms in the corporate sector are concerned. The tax changes, Direct Taxes Code and Goods and Services Tax, have not come into effect. The Companies Bill has been passed, but only a few sections have been notified. The regulatory changes were less than expectation. The multi-brand retail policy has not got any substantial responses, except the Tesco entry announcement at the year-end, but with a lower end brand. The most cheerful regulatory issue was the Jet sale to Etihad, but that has also turned sour, with the Competition Commission of India slapping a Rs 1-crore fine on Etihad and there is reportedly rethinking on the Safe Harbour Rules.

In the past few years, the tax department has been pulling up multinationals under the tax scanner. It possibly started with the Clifford Chance case, where the Mumbai High Court held Clifford Chance liable for paying tax in India for technical services. Another law firm, Linklater, was held by the Mumbai ITAT to be assessable as a Permanent Establishment. And then there came Vodafone ruling of the Mumbai High Court, which held Caymen Investments to be liable to pay capital gain tax in India.

In 2013, India witnessed a substantial amount of regulatory changes in the corporate arena such as liberalisation of FDI norms in various sectors like retail, telecom and insurance and the change in meaning of 'control', following the enactment of the Companies Act, 2013 and other corporate policies. Among all the developments pertaining to corporate laws, last year has witnessed maximum high profile verdicts on tax issues. Apart from Vodafone IBM, Royal Dutch Shell Plc. were some of the early victims, who were hauled up by the tax authorities for alleged tax evasion.

The Supreme Court versus Vodafone judgment and subsequent review petition have attempted to address this issue, but it continues to remain under the scanner till such time the issue of the retrospective amendment is revisited. Multinationals, generally adopt corporate structures that save taxes to the best extent allowed by laws and international tax treaties. However, Indian authorities have always challenged such structures alleging them for being used for evading the nation's revenue. In the circumstances, the Nokia judgment passed by the Delhi High Court, if not eradicating the inequities, aims at fair play and justice. It is reported that the Finnish company has welcomed the ruling and there are no noises to the contrary from Microsoft. Over the years, Nokia has attained the status of a preferred brand among mobile phones in India and other jurisdictions. Recently, however, there has been a perception / disenchantment among consumers with the device, which includes myself, as there appeared something not quite right with the products. It was only in December 2003, when the Delhi High Court passed its ruling on a writ petition filed by Nokia India Private Ltd, that one fully understands that how the activities of an investor which has been successfully operating in India since 1993 from bases in Chennai, Bangalore, Gurgaon and Delhi could be crippled. The random actions of the income tax authorities against Nokia India, a subsidiary of the Finland-based company, which entered India 18 years ago, and has been one of the fastest growing in its field as a market leader and having large investments in India. Nokia India had paid corporate tax of Rs 2,181 crore for assessment years 2001-02 to 2012-13. The writ petition filed in the Delhi High Court has its genesis in January 2013, when the income-tax authorities undertook a survey under Section 133A of the Income-tax Act, (the Act) alleging that certain 'significant defaults' were noted and the assessments for the years 2006-07 and 2007-08 were reopened and notice under Section 143(2) of the Act for 2009-10 to 2012-13 issued. The basic allegation is that there was improper withholding of tax by Nokia India for certain payments made by Nokia India to Nokia Finland which did not comply with the transfer pricing requirements. The tax authorities made a survey under Section 133A of the Act at Chennai in January 2013 and proceedings under Section 195 of the Act were initiated on March 15, 2013. Nokia India approached the Delhi High Court impugning the tax authorities provisional attachment of bank accounts of the company as well as its trade receivables and advances, long-term loans and advances as well as innumerable properties including land and building and the SEZ industrial park plot, and at least 20 properties in prime locations all over the country. The court issued an interim order restraining the tax authorities from taking coercive measures for recovery of the demand. For its part, Nokia India had to provide an undertaking to the effect that they would refrain from transferring or remitting anything out of India till the next date of hearing. The claim of the tax authorities was estimated to be Rs 21,000-Rs 25,000 crore. On

June 21, the office of the Director of Taxes directed Nokia to make payment of 35 per cent of the total outstanding of Rs 2,080 crore in three monthly instalments. It was at this stage, in the course of the Court proceedings that Nokia informed the Court that an agreement with Microsoft had been arrived at for the sale of Nokia Finland's cell phone business globally. This was to take place either by an asset or share transfer. However, it was clarified by Nokia India also in the course of the proceedings that the buyer, Microsoft International, would proceed with the asset sale and not shares. The high court granted release of the assets subject to an amount of Rs 2,250 crore being deposited in an escrow account, and a guarantee being provided by the Finnish parent company to the extent of Rs 3,500 crore. The court was clear on the one point that Microsoft would not be liable to pay Nokia India's potential liabilities.

From the tax authorities point of view there has been unrelenting pressure for more collections, and this applies to most jurisdictions. This is where I revert to my last column, that if a nation is projecting itself as an attractive and lucrative investment destination, taking a jingoistic and negative position is not the way forward. To give an example, Nokia's land, building in the SEZ plot and machinery are of no value on a standalone basis, so there was no point in attaching or trying to sell this property except for making a power statement by the revenue authorities.

The court has taken a balanced approach deprecating the negative stand taken by the revenue department in not accepting the offers of Nokia India but recognising that there are apprehensions and misgivings on both sides. The court has held that if Nokia-Finland has made profits, Nokia India has paid the taxes, and therefore has made Nokia Finland to be jointly liable for the tax demand, if any, and therefore an escrow account has been created where both Nokia companies have to deposit at least $362 million jointly. Nokia Finland and other associate enterprises have paid paltry taxes, and then the court quickly washes its hands off saying this is only a prima facie view as there are several calculation norms and pleas of both Nokia India and Nokia Finland.

At the end, the court itself sounds tired in modifying the interim order and permitting the sale of assets to Microsoft holds the escrow account to remain but expresses concern that this may create problems under Article 26 of the DTAA, which provides for assistance in collection of taxes due and payable by a state from a resident of another collecting state. This is the revenue department's concern as well. Basically, the high court has provided a way forward.

However, there are issues which remain open and which are yet to be dealt with by the court. For the time being, it is the sale to Microsoft which has been cleared, the rest is a story for another year, and may be another Bench.

Kumkum Sen is a partner at Bharucha & Partners Delhj Office and can be reached at

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First Published: Sun, December 29 2013. 22:35 IST