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BW Businessworld

Tax Cases That Shook Telecom World

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There are two tax cases that could change the way business is done in India, depending on the final verdict. Both cases are related to the telecom companies — UK-based Vodafone and Finland’s Nokia. Vodafone has already initiated arbitration against India under the Bilateral Investment Treaty (“BIT”) between India and the Netherlands; Nokia could follow the same route under the India-Finland Bilateral Investment Treaty (BIT).
It all boils down to the retrospective amendment of Section 9(1)(vi) of the Income Tax Act 1961, which was done in the last Budget when the Supreme Court ruled in favour of Vodafone.
Nokia's problems started in January 2013, when the income tax department sought clarifications on non-payment of tax deduction at source on software supplies and changes in accounting model. It primarily relates to payment of royalty on software to Nokia Oyj, Finland. While the I-T department put a freeze on the factory, it asked Nokia to put Rs 3,000 crore in an escrow account. Nokia put Rs 750 crore in an escrow account and said that it would provide a surety of Rs 2,250 crore.
To top it, the Tamil Nadu government imposed a Rs 2,400-crore commercial tax penalty early this year. Thanks to the dispute with the government, and the asset freeze imposed on it, this plant was not included in the $7.2 billion deal by Microsoft to acquire the assets of Nokia.
That has impacted Nokia’s largest factory globally sited on a 210-acre plot in Sriperumbudur. As things stand the plant could well be shut down. Already the workforce has fallen from an all time high of over 12,000 to 6,600 now. At least 5,000 employees have opted for a voluntary retirement scheme (VRS).
Nokia has now sent a letter to the Prime Minister’s Office (PMO) by its law firm Allen & Overy LLP that stated: “The Indian Government has recently made certain changes to its tax legislation. In particular, in the Finance Act (2012), India retrospectively amended section 9(1)(vi) of the Income Tax Act (1961). In addition, Indian tax authorities have raised substantial tax demands against Nokia and its subsidiaries seeking allegedly unpaid taxes, imposed freezing orders on various Nokia assets and failed to comply with various other obligations owed to Nokia’s subsidiaries.” 
In case there is no amicable settlement, Nokia will go in for arbitration. Speaking on the BIT, a Nokia spokesperson stated: “Nokia is keen to work with authorities in India to resolve the tax disputes. As one of our actions Nokia has sent a letter under Finland India Bilateral Investment Treaty (BIT) to the Hon’ble Prime Minister of India. The letter seeks for amicable resolution of the current tax disputes.”
The tax issues will put a dampener on foreign investment in manufacturing in the country. The way the cases are resolved could well pave the way for the future. In case the government wins, it could be a big blow to foreign investment in the country. In case the companies win, it could well be time for the government to stick to the knitting.