Vc Circle

The tax administration could have sought a charge and permitted Nokia to transfer the asset.

The Delhi High Court has accepted an appeal by Finland-based Nokia Inc to lift the freeze on the company’s factory at Chennai asking the company to deposit Rs 2,250 crore in an escrow account as a condition for releasing the factory and transferring it to Microsoft. The development would pave the way for the closure of 5.4 billion euro Microsoft deal. VCCircle captures the instant reactions of two lawyers on the implications of the verdict:

Daksha Baxi, executive director, Khaitan & Co: The order of the Delhi HC in the case of Nokia India is fair and balanced and brings relief to Nokia India and to Nokia in general…The court has protected the interest of the revenue by requiring Nokia to deposit Rs 2,250 crore in escrow (against the tax demand of Rs 2,080 crore covering five financial years starting from 2006-07). Against this, Nokia is now permitted to sell its Chennai factory to Microsoft. The tax authorities will need to work out the modalities of giving effect to the lifting of the seizure and permitting the sale, especially in view of section 281 of the Income Tax Act, 1961. It is pertinent to note that the tax demand has not been set aside as the contentious issue of taxation of Nokia India is yet to be determined on merit.

Mukesh Butani, partner, BMR Legal: The matter assumed significance since Nokia as part of its global sale to Microsoft had proposed to sell its 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 the slugfest?

The question before the HC was the quantum of anticipated demand it should ask from Nokia by way of guarantee to protect the tax administration’s interest. As I understand, Nokia in its pleadings before the HC had offered the initial amount of Rs 2,250 crore as a security and I wonder what was the tax administration’s 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 investor 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 characterisation (weather 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 the 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 the basis to assume that Nokia indulged in tax evasion and hence, penalties could be estimated?
5. Lastly, Nokia invoked the mutual agreement procedure 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 judgment 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.