Nokia filed a petition to the Delhi High Court in March, which would be put on hold if India agrees to enter MAP, though the country's government previously rejected a similar request from the Dutch government in the Vodafone case.
"We can confirm that the mutual agreement procedure under the India-Finland tax treaty has indeed been invoked, but given the fact that the tax case remains open, we cannot comment on any details at this stage," a Nokia spokesperson said.
MAP
The Indian tax authorities are contending that Nokia India evaded a 10% tax on royalties of software downloads from its Finnish parent company.
India claims that Nokia incorrectly failed to withhold tax on royalty payments made to its parent for the software used in its mobile phones since 2006.
Although almost all Indian tax treaties now include a MAP provision, providing the possibility for resolving cross-border disputes through negotiation between competent authorities of two states, India is not bound to accept Finland's request to apply MAP.
Ravishankar Raghavan, of Majmudar & Partners, said that given the aggressive stance taken by the Indian authorities in the Nokia dispute, it is highly unlikley that the government will agree to consider negotiations under MAP.
Indian tax rules provide that any resolution arrived at under MAP is to be given effect by the tax officer within 90 days from the receipt by the Chief Commissioner of Income-tax or Director General of Income-tax, if the taxpayer:
Accepts the resolution taken under MAP; and
Withdraws its appeal, if any, pending on the issue which was the subject matter for adjudication under MAP. In Nokia's case, this would mean withdrawing the High Court petition.
If proceedings are initiated under MAP, Nokia will be able to obtain a stay on the tax demand provided it gives a bank guarantee.
The outcome of MAP negotiations will not be binding on Nokia unless the company accepts the result. This was confirmed by the Central Board of Direct Taxes (CBDT) in its instruction no. 12/2002.
India's Ministry of Finance has confirmed receipt of the MAP application, though has not offered any indication of whether it will accept.
Sanjay Sanghvi, of Khaitan & Co., said if MAP negotiations proceed, one of the arguments likely to be taken by the Finnish government could be that the software payments made to Nokia Finland were in relation to purchase of raw material and spare parts for its handset business and such payments cannot be treated as royalties under the Indian Income-tax Act (IT Act) or under the India-Finland tax treaty.
"The Indian government is likely to take a stand that such software payment made by Nokia India to Nokia Finland was for acquiring copyright or the right to use certain products, which would constitute royalties under the IT Act as well as the tax treaty," said Sanghvi.
Shefali Goradia, of BMR Advisors, said the taxability of software payments has been a very litigious matter in India and the debate hinges on whether the vendor provides to the user the use of a copyrighted article or does it allow the use of its copyright.
“Based on judicial precedents, consideration received for the former is not taxable whereas consideration received for the latter is taxable as royalty. However, the distinction between these two terms has recently been subject to extensive litigation, with many courts holding that copyrighted article is not a concept recognised in the IT Act,” said Goradia.
The tax authorities have also sought to distinguish the Delhi High Court ruling in Nokia’s own case. As an alternate, the authorities have alleged that Nokia Finland may have a permanent establishment in the form of Nokia India’s office, however no conclusion has been made in this regard.
“On the other hand, Nokia India has sought to place reliance on various decisions of various courts wherein it has been held that sale of a copyrighted article does not fall within the purview of royalty,” said Goradia.
“Nokia may also argue that it was under a bonafide belief that no taxes were deductible on payments made to Nokia Finland and hence it could not be treated as an assessee-in-default under the provisions of the IT Act,” she added.
