Nokia India has got itself into a terrible mess over alleged failure to deduct TDS on royalty payments to its parent company. What would have ended with a mere 10% tax rate has now morphed into a horrendous tax liability. Nokia is now desperate to sell its assets but the Income-tax department has a strangle-hold over it and is calling all the shots. It will take all of Harish Salve’s wizardry to pull Nokia out from the deep hole it is in. Can he do it?
Anybody dealing with multinational conglomerates will tell you that their biggest problem is one of overconfidence and lack of accountability, especially when dealing with poverty-stricken third World countries. Deals worth billions of dollars are put through by some expatriate executive, high on adrenalin, sitting in an exotic location like New York, London or wherever, without a second’s thought for the legal and tax implications in the dusty by-lanes of the Third World Country where the deal is to be implemented.
Somehow, a feeling seems to have developed amongst the MNCs that because these Third World countries need foreign capital so desperately, the MNCs can do what they want and get away with it, with nobody to pull them up.
We saw how this attitude got Rolls Royce, the so-called torch bearer for good corporate governance, into serious trouble with the Indian tax authorities. The Tribunal expressed unhappiness that Rolls Royce concealed the true facts as to its taxable transactions and this finding was upheld by the High Court.
Nokia seems to be a victim of the same “Devil may care” attitude. It set up a subsidiary in India, Nokia India Pvt. Ltd, to manufacture mobile phones. It invested over $300 million at the 210-acre plant in Sriperumbudur, near Chennai, and produced 500 million units in six years. Nokia agreed with the Indian subsidiary to provide it with the technology and technical know-how required for this purpose and in return, the subsidiary had to pay it royalty.
What is astonishing is that while royalty of about Rs. 25,000 crore was paid by Nokia India to its parent over the financial years 2006-07 to 2011-12, nobody appears to have bothered to ask whether the said royalty was chargeable to tax in India, in the hands of the parent, under section 9(1)(vi) of the Act or Article 12 of the India-Finland DTAA and whether the Indian subsidiary was liable to withhold tax at source under section 195 of the Act. The huge royalty was merrily paid to the Finnish parent and a deduction thereof was claimed by the Indian subsidiary, without a care in the World for the Indian tax implications.
Now, whatever may be said of the sloth and inefficiency of the rank and file of the income-tax department, its top brass is very agile, especially when it comes to big-ticket matters. When the top brass smells big money, it pulls out all the stops and comes out with all guns blazing against the alleged defaulter.
We saw this in the Vodafone share transfer matter where the department set up a high-level think-tank to monitor and guide the litigation, with direct access to the Revenue Secretary and the Finance Minister. It is this perseverance that got them victory two times in the High Court against Vodafone though Harish Salve’s wizardry proved to be their undoing in the Supreme Court. Even in the other heavy duty transfer pricing matters of Vodafone (1) & (2), the department is taking no chances. It has deployed heavy artillery in the form of Solicitor General, Mohan Parasaran. He is firing on all cylinders at the moment and has managed to check-mate Harish Salve so far.
In the Nokia matter, as soon as the department became aware that something was amiss, it conducted an instant survey, impounded all the relevant documents and, with remarkable alacrity, treated the Indian subsidiary as a defaulter u/s 201 for failure to deduct tax at source and also disallowed its claim for deduction of the royalty expenditure u/s 40(a)(i) of the Act.
Now, this is a double whammy for Nokia India because for the default of non-deduction of TDS, not only is it being asked to pay the tax (with interest), but the deduction for the expenditure is also disallowed. But that, unfortunately for it, is the law of the land and it cannot be helped.
The result: A whopping demand for tax and interest of nearly Rs. 6,000 crore or thereabouts.
Nokia arrived at an understanding with the department pursuant to which an order dated 21.6.2013 was passed under which it agreed to make payment of Rs.700 crore in installments. Nokia did pay three installments of Rs.50 crores each but the department got jittery when it learnt that Nokia India suddenly remitted Rs. 3500 crore (the accumulated earnings for the past several years) to its parent company and also entered into an agreement with Microsoft to sell off the Chennai plant (as part of a global $8 billion deal).
The departmental officials summoned Nokia’s top brass, Lari Hintsanen, World Head of Taxation, for clarification as to its intent. When the department asked for a copy of Nokia’s agreement with Microsoft, they were told that it could not be given on the grounds of secrecy. When they asked for details of the transaction, they were told that the nuances were not known. When the department asked whether Microsoft, as successor to the business of Nokia India, would bear the tax liability, the answer was apparently evasive. That’s when the department seems to have feared that the bird is going to fly the coop. They swooped down and attached all 15 of Nokia’s bank accounts and debtors u/s 226(3) of the Act and also passed provisional attachment orders u/s 281B of the Act in respect of the expected demands for the on-going assessment years.
This paralyzed Nokia India’s business and brought it to a grinding halt.
At this stage you have to pause and compliment the department for its speedy reaction because if it hadn’t moved as fast as it did, Nokia India would probably have quietly sold off all of its assets in India, repatriated all of its’ funds to Finland and cocked a snook at the department.
In the High Court, on 26.09.2013, Nokia’s counsel, Dr. Abhishek Manu Singhvi, stated that Nokia has no intention to close its operations in India despite the sale of the Chennai plant to Microsoft. On that basis, the Court ordered the release of the bank accounts but on strict conditions. Nokia was directed to continue to pay as per the installments stipulated in the order dated 21.6.2013. It has been restrained from alienating its immovable and movable assets. It needs to inform the AO in advance if it intends to repatriate funds abroad and if the AO feels the purpose is questionable, he can approach the court for appropriate orders. Payment of dividend to the Finnish parent is prohibited without permission of the Court. In addition, Nokia has been asked to explore whether any declaration can be furnished by the foreign parent or a third party to protect the interests of the revenue in case there is any shortfall or failure to pay tax arrears.
Now, Nokia’s immediate problem is that it cannot wait for the appeal process in the Tribunal to take its tortuous course because the $8 Billion global sale deal with Microsoft is hanging fire and Microsoft is breathing down its neck. It needs permission from the Court to sell the Chennai plant to Microsoft and the Court will probably not give the permission if the present and potential dues of the department aggregating about Rs. 6000+ crore are not paid or secured.
That is why the department is in a position where it is calling the shots. At the hearing on 2nd December, Nokia offered to pay Rs. 2,500 crore against the demand and that was rejected outright and contemptuously by the department. The Court also does not appear to have been impressed by the offer because the Judges are reported to have commented to Harish Salve that you are “offering nothing”.
In reply, Harish Salve shot back saying “we are not in a position to offer more“, suggesting that the Chennai plant is itself not worth more than that sum.
The Court also appeared to be irked by the sudden repatriation of dividend by Nokia India of the accumulated earnings of the past 18 years. It took a stern stand and demanded to know “Why did you transfer Rs.3,500 crore abroad? Was it not your intention not to keep liquid assets here? You had Rs. 4,100 crore cash here (the dividend + tax thereon). You repatriate it back to India” the Judges are reported to have said.
The Court also appeared to be unhappy with the fact that while Abhishek Singhvi had stated at the hearing of 26.09.2013 that Nokia “has no intention to close their operations in India”, it had now changed its stand and stated that the Indian operations would be wound up. “When they (IT department) attach your bank accounts, you come here. That time you were categorical that manufacturing (here) will go on. Now, there is a change in your stand. So shouldn’t the amount (that was repatriated) be brought back to India?” the Bench is reported to have said.
So, that is where the situation stands today. Nokia’s options are either to bring in Rs. 6,000+ crore to secure the department but that may not be worth it if the Chennai plant is itself worth not more than Rs. 2500 crore. The option of getting Microsoft to handle the liability is also probably a non-starter because who would want to get involved in a mess like this. The other option is to take the Chennai plant out of the Microsoft sale deal and to use it for contract manufacturing for Microsoft, till the merits is decided one way or the other. What happens if, God forbid, the merits go against Nokia is not something one should contemplate at this stage though the simple solution for Nokia would be to hand over the Plant for whatever it is worth to the department and wind up the subsidiary. Thanks to the doctrine of limited liability, the Parent will not be liable for the deficit arrears.
The other strategic solution that Nokia is exploring is a political one by dropping hints that the tax department’s move will render nearly 30,000 people unemployed. Finland’s Foreign Minister, Erkki Tuomioja, is reported to have said that if the attachment of the Chennai factory was not vacated by 12th December, the factory would be left out of the Microsoft deal and closed down, jeopardizing the future of thousands of workers and sub-contractors.
Anyway, now all eyes are on Harish Salve to see if he can pull out some other workable solution from his hat to bail out Nokia and save thousands of Indian jobs when the matter comes up for hearing in the Court on 9th December.