Money control

In a petition filed by Nokia against order of the tax administration to freeze all assets of Nokia in India against anticipated liabilities (claims range between 2500 to 21,000 crores), the Delhi HC has granted release of such assets subject to an amount of Rs. 2250 crores or higher of the sale proceeds from sale to Microsoft being kept in a designated escrow account and a further guarantee by the Finnish parent to the extent if Rs. 3500 crores.

The dispute surrounds a vexed issue on whether payments by Nokia India to Nokia Finland should be liable for withholding tax ( being in the nature of Royalty as alleged by the tax administration). This demand amounted to roughly 2000 crores. The demand ballooned further when a separate wing of the tax administration choose to disallow the so called Royalty payment on the ground that there was failure to withhold tax.

The matter assumed significance since Nokia as part of its global sale to Microsoft had proposed to sell their Indian plant. The tax administration exercising its powers under section 281B of the Income tax code ordered freezing of assets with an intent to protect its interest for any potential tax liabilities.

Was such stern action called for ? After all the asset would continue to remain in India, albeit under Microsoft’s ownership. Could the tax administration have sought to create a charge and allowed Nokia to transfer the asset? Did Nokia and the administration have to go through this slugfest ?

The question before the HC was the quantum of anticipated demand it should demand from Nokia by way of guarantee to protect the tax administrations interest. As I understand, Nokia in its pleadings before the HC had offered the initial amount of Rs. 2250 crores as a security and I wonder what was the tax administrations wisdom to seek sums in multiples of the amount by adding penalties and double disallowance. In my view the administration by doing so lost an opportunity to build goodwill with an ambassador of India who has been an early investor. As I recall, Nokia was amongst the first investors way back in 1992 when it signed an alliance with Wipro.

To support what I am saying, I want to put the following facts:

1. The quantum issue on merits is a subject matter of dispute before the tribunal and the tribunal has satisfied itself and granted the requisite stay. The tribunal decision could have been awaited.
2. The issue on characterization (whether payment to non resident is Royalty or business income) is a vexed issue and the matter was not examined in the context of Nokia.
3. This debatable issue has witnessed multiplicity of conflicting decisions rendered by the tribunals and high courts for other tax payers. There are a batch of civil appeals before the Supreme Court on the same matter. How can Revenue even in the interest of protecting itself demand the entire amount, including for years when no assessment has been made plus interest plus penalty.

Shouldn’t the tax administration have shown magnanimity in this case given the facts ?

4. If it is evident that the matter is debatable, where is the case for levy of penalty? Isn’t this a settled position under the law ? What was then basis to assume that Nokia indulged in tax evasion and hence, penalties could be estimated ?
5. Lastly, Nokia invoked the mutual agreement procedure (MAP) under the treaty to resolve the withholding tax issue and ironically, when the matter on de freezing of assets was being argued in the court, the revenue officials of Finland and India were engaged in negotiations to resolve the matter under a treaty framework.

Several questions have come up in the context of present dispute which has received wide media coverage and I guess, one would wait to read the judgement to see what the Court has said. I guess, it’s another instance where India would be made a mention about in the context of acting unreasonably towards a foreign investor.

Views are entirely personal.