Speed call

It is unfortunate that the future of some 8,000 employees of Nokia’s factory near Chennai is at stake over a tax dispute — the company’s ‘failure’ to deduct tax on royalty payments made to its Finnish parent for proprietary software used in mobile handsets. Nokia may well owe the Income Tax (IT) department money on this account. But even while contesting the claim, it had agreed to put up ₹2,250 crore in an escrow account as security. Yet, things have been allowed to reach a level where an initial tax demand of under ₹2,100 crore has mounted to over ₹21,000 crore, including penalty, interest and ‘anticipated’ liabilities. The Supreme Court has now upheld a Delhi High Court order directing the Finnish parent to furnish a ₹3,500-crore letter of guarantee covering its subsidiary’s potential liabilities, in addition to the sums deposited in the escrow account.

What makes this dispute particularly worrying is that it could jeopardise the transfer of the Chennai unit as part of Nokia’s $7.5 billion deal to sell its mobile devices business to Microsoft. If the IT department’s freeze on the assets of the factory is not lifted — which is conditional upon Nokia giving the guarantee for its projected tax liabilities — there is no way the transfer can happen. In the event, Nokia may run the unit as a contract manufacturing operation. But this arrangement is unlikely to last long, given that Nokia has already decided to exit the phone business globally and will have little interest in keeping the Chennai plant going. Microsoft, on its part, will manufacture its handsets in China, Taiwan or Vietnam (where Nokia only last year set up a plant) even for servicing the Indian market. The end-result will be not only closure of India’s only significant handset manufacturing facility, but also a blow to plans of developing Sriperumbudur and other places as production hubs for both the domestic as well as export markets.

It is, therefore, worth asking whether there aren’t ways of amicably resolving the tax row. It is in everybody’s interest to ensure a smooth transfer of Nokia’s Chennai plant’s operations to Microsoft. There is certainly room for the IT department to be more reasonable about recovering tax dues from Nokia beyond the original demand. Likewise, Nokia should accept the Supreme Court’s ruling while seeking to negotiate a reduction in the overall tax demand, including the guarantee amount. A solution acceptable to both parties is something that even the apex court has suggested. A speedy resolution is, moreover, important given that the Microsoft-Nokia sale is slated to close by this month-end. Even if the transfer of the Indian assets cannot happen immediately, putting it off too long may prove too late and too costly.

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