The uncertainty surrounding the Chennai facility has raised a number of issues

When elephants battle, the ants perish!  How else could one describe the predicament of the workers of Nokia’s India unit Sriperumbudur (near Chennai)? On Friday last, the devices business of the Finnish company formally moved over to software giant Microsoft under a 5.4 billion euro agreement inked late last year.  Loss-making and struggling, the division still has a strong brand visibility with a sizable global workforce of 32,000. Nearer home, however, the focus is on the fate of the 7,500 workers at Sriperumbudur. They find themselves in a peculiar position. Caught between a reluctant Microsoft and a ready-to-give up Nokia, these young men and women are unsure of their future. They are now like unwanted children. They are the victims of insensitivity demonstrated by people who matter and the powers-that-be.  

A dip into some numbers will give a clue or two to the status of the Chennai plant, which has transformed the very landscape of the industrial corridor in this belt along with other iconic multinationals such as Hyundai, Saint Gobain and Flextronics, to name just a few. The plant reportedly had notched up a revenue of Rs.150,000 crore between 2006-07 and 2012-13 by exporting handsets to about 75 countries. Viewed against this backdrop and coming in the wake of its deal with Microsoft, the uncertainty surrounding the Chennai facility has raised a number of issues.

Compounded worries

The problem started when Nokia got embroiled in a Rs.21,000-crore dispute with the tax authorities. That has developed into a full-blown legal tussle going right up to the highest court of the land, with contesting parties taking strident positions. Early last month, the Supreme Court dismissed Nokia’s appeal challenging a Delhi High Court order inserting a rider in the transfer of the company’s Indian assets to Microsoft.  The Delhi High Court had asked Nokia to give a ‘simple undertaking’ in addition to depositing Rs.2,250 crore in an escrow account. Nokia was unwilling to accept this new condition, and, hence, moved the Supreme Court. Acceptance of this condition would have resulted in Nokia agreeing to an open-ended guarantee that the company would meet any future tax claims relating to the dispute. And, the Delhi High Court made it clear that these conditions must be first satisfied before Nokia could transfer its Indian assets to Microsoft.

Problems never come singly, it is said. Even as it was fighting the I-T case, Nokia’s troubles were compounded further when the Tamil Nadu Government slapped a Rs.2,400-crore tax notice on the company. The state government claimed that the devices made at the company’s Chennai plant were sold domestically and not exported as claimed by the company. The timing of the notice is puzzling indeed. Why did the TN government sleep over this all these years if Nokia had indeed not been exporting but only selling locally?

Microsoft is obviously not willing to touch the legal-riddles-hit Chennai plant.  And Nokia has little options. Having quit the devices business, a disinterested Nokia is now forced to hold on to an unwanted baby (Chennai plant)!

The Nokia imbroglio has brought into focus the sharp differences in the way tax-related disputes are handled, especially in the context of emerging international order, where mergers and acquisitions are common. Tax on royalty payment is always a contentious issue. This has become so in view of the differing views on the applicability of rules. Should Section 115A of the Income-Tax Act, 1961, be applied? If so, it obliges an Indian resident to deduct a 10 per cent tax from royalty payments to a foreign company. Nokia India (which is a resident of India) has been paying Nokia Finland royalty for software downloaded into the handsets made in India.

Royalty is paid for the use of technology for producing goods or services in India for earning income within India. Ipso facto, it is in order to demand a foreign company — irrespective of its location — to cough up tax in India. Some analysts are of the view that the Indo-Finnish double taxation avoidance agreement, too, concedes that a 10 per cent withholding tax could be deducted. The moot question is whether Nokia Finland passed on the technology to India. What if the technology had been developed elsewhere in the globe and passed on to Nokia India? One argument runs like this. If the software is downloaded and if such downloading requires royalty payment, the Indian tax authorities have the right to demand their share. The software is after all used in the products made in India, and thus helps to beef up their profitability. The Indian tax authorities have relied on the UN model, which lays store by the source rule of taxation. In this instance, the source of income for Nokia Finland is in India. This methodology has not found favour with many a global company. They prefer the OECD (Organisation for Economic Co-operation and Development) model, which focuses on the ‘resident rule’. Nokia Finland is not a resident of India, and, hence, its tax liability is to the Finnish government and not the Indian government. So runs an argument.

M&A conundrum

This tax debate can go on till the cows come back. The issue, however, is how do we address the M&A (mergers and acquisition) consequences, in the meanwhile. Any effort to hold up the process is bound to vitiate the competitive environment, which New Delhi has assiduously tried to build ever since the globalisation process was set in motion in the early 1990s. What has come to hurt in this specific instance is not just the way the taxmen have gone about doing their job but the timing. They caught on to Nokia just when the stage was set for the transfer of the device business to Microsoft. May be they have timed it right so as to squeeze the Finnish maker into submission. Nokia, too, hasn’t helped the cause for an amicable solution to the issue. It is not willing to provide a guarantee to meet any future claims relating to the tax dispute. The underlying assumption here is simple. What if the ruling goes against it?

Could the authorities have allowed the transfer of Indian assets when the case is pending? Is it possible to make the acquirer honour the court order once the final verdict is pronounced? In that case, the current uncertainty could have been avoided. While blocking only the transfer of assets, the plant workers have been unjustly discriminated against vis-a-vis the other employees (like sales and marketing), who have been moved to the recently-formed subsidiaries.

The Nokia episode doesn’t augur well for any of the stakeholders, especially the workers. There are many lessons to be learnt. The most important is finding an acceptable tax framework that is in sync with the dynamics of the market economy, and also just and equitable.


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