The court gave the go-ahead for the sale of its assets in India as part of a global deal wherein Microsoft is proposing to acquire the devices and services business of Nokia. This relief is however, subject to fulfillment of certain conditions by Nokia India and Nokia Finland. However, the disputes, which relate primarily to taxability of various payments made by Nokia India to Nokia Finland as a consideration for use of ‘software’, are to be decided on their merits by the Income Tax Appellate Tribunal.
Nokia India, a subsidiary of Nokia Finland, is primarily engaged in the business of manufacture and sale of mobile phones. The Tax Department surveyed the premises of Nokia India at Chennai and alleged significant defaults as a result of which certain past tax assessments of Nokia India were re-opened. The Tax Department also initiated proceedings against Nokia India for failure to withhold tax at source on payments made to Nokia Finland. Consequently, the Tax Department disallowed the expense deduction of payments made to Nokia Finland due to the non-withholding of tax on such payments.
The withholding tax related proceedings were completed within two months by the Tax Department and a total demand of Rs19.12 billion ($310 million) was raised on Nokia India. The Tax Department sought to enforce the demands within five days. These orders were challenged by way of several writ petitions which were disposed of with the direction that the demands shall be enforced after the normal period of 30 days as available under the Indian Income-tax Act, 1961 (IT Act). The appeals filed by Nokia India against the orders passed by the Tax Department were dismissed at the first appellate level (that is, the Commissioner of Income-tax (Appeals)). This issue is pending for adjudication before the Income Tax Appellate Tribunal (Tribunal).
Subsequently, orders to keep the demand in abeyance were passed wherein Nokia India was directed to pay Rs7 billion by March 2014. There was no stipulation or restriction on repatriation of the reserves to Nokia Finland by way of dividend. Nokia India remitted Rs3.500 billion as a dividend to Nokia Finland. The dividend payment resulted in a cumulative outgo of Rs4.095 billion (including the dividend distribution tax paid by Nokia India at the time of the distribution of the dividend). As a result of this dividend payment by Nokia India, the Tax Department issued a provisional order to attach certain Nokia India assets of Nokia India including its bank accounts. The High Court, in an earlier order, allowed the company to operate its bank accounts in India after imposing certain restrictions such as the filing of monthly statements of bank accounts with the Tax Department, informing it in advance about any money being remitted abroad and a restriction on transferring/ selling/ alienating immoveable properties that were attached.
In the meanwhile, Nokia Finland and Microsoft entered into an agreement for the sale of a substantial portion of Nokia Finland’s global devices and services business to Microsoft International Holdings (a subsidiary of Microsoft). Microsoft was only interested in purchasing the assets if approvals are granted by the relevant authorities and Microsoft was also aware of the liens on the assets. Nokia India argued that in case Microsoft refused to purchase the Indian assets, it would have no option but to wind up manufacturing operations within 12 months. The land, building and machinery which were located on Special Economic Zone land were incapable of being transferred on a stand-alone basis and would not fetch any substantial value if so sold. Nokia India further offered to make a minimum deposit of Rs2.25 billion in an escrow account to meet the tax liabilities. Nokia Finland also agreed to give a letter of guarantee acknowledging their obligation to pay the income tax liabilities which may ultimately be found to be payable, after exhausting all legal remedies. Nokia Finland however, declined to give any similar letter of guarantee for Nokia India’s tax liabilities.
High Court verdict
The High Court recognised the fact that considerable time would pass before all the disputes are settled. It observed that closing down or keeping out Nokia India, when Nokia Finland is transferring and disposing of its global hand devices/mobile phones business, may not be a sound and considered decision or even in the interest of the Tax Department, as there could be a sharp decline in the market value of the assets of Nokia India. Given this, the High Court allowed the sale of assets by Nokia India to Microsoft/ Microsoft International subject to the fulfillment of certain conditions which include:
- Nokia Finland to be bound by the statement that they shall be jointly liable and shall pay the tax demand determined and payable due to non-withholding of taxes at source.
- Nokia Finland shall be liable to pay taxes including penalties and interest as determined under the IT Act.
- Nokia India/Nokia Finland to deposit at least Rs2.25 billion in an escrow account, details of which will be furnished to the Tax Department within one month of the agreement with Microsoft/Microsoft International. The amount of the deposit will go up or increase upon higher consideration being received from Microsoft/Microsoft International, as per valuation report.
- A copy of the valuation report will be furnished to the respondents within 15 days of acceptance.
- In case the amount deposited is adjusted against the tax liabilities of Nokia India and Nokia India subsequently succeeds in its claim that such amounts are being taxable, such amount would be refunded to Nokia India with interest in accordance with the provisions of the IT Act.
- Nokia India/Nokia Finland will continue to pay Rs7 billion in installments in terms of the earlier order and this amount would have no co-relation with Rs2.25 billion.
- The High Court has also kept it open for Nokia India / Nokia Finland and the Tax Department to have recourse to mutual agreement procedure or mutually modify the terms and conditions of this order and approach the High Court in case modification or if any clarification is required.
The subject matter of the dispute before the High Court in the present case was not whether Nokia India was liable to withhold taxes on payments made to Nokia Finland. Accordingly, the High Court has not expressed any opinion on the merits of the case.
In our view, the High Court has achieved a positive balance by permitting Nokia India to sell its assets to Microsoft while at the same time protecting the interests of the Tax Department.
Sanjay Sanghvi (email@example.com) is a partner and
Surajkumar Shetty (firstname.lastname@example.org) is an associate in the tax practice of Khaitan & Co.
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