With so much being made of India’s aggressive tax administration, it’s encouraging to see positive judicial intervention.

India has been at the centre of tax controversies for some time now and multinationals operating in India have been sharing this spotlight with the tax authorities. The issues involved in most of these litigations are a result of the changing face of cross-border business and the applicability of existing tax provisions leading to divergent views, with tax administrators taking a conservative view and taxpayers taking a liberal one.

Tax authorities are not just calling for information from the auditors but also conducting survey operations to extricate the information and details that substantiate their stand and view.

A case in point is the tax dispute of Nokia India Private Limited (Nokia India). The tax authorities conducted a survey operation u/s 133A on the premises of Nokia India. Based on the findings, they alleged that Nokia India was under obligation to withhold tax on payments to Nokia Corporation, Finland (Nokia Finland), for software downloaded onto its handsets manufactured in India.

Accordingly, Nokia India was held liable to make good the withholding tax not collected. In a double whammy, the amounts of royalty paid without deduction of tax were also disallowed as a deduction consequent to the provisions of Sec 40(a) (i) of the Act and subjected to additional corporate tax. Hence, the tax authorities raised a tax bill of approximately Rs 2,000 crore for the alleged default of withholding tax on the one hand and on the other, a corporate tax demand consequent to the disallowance of the said expenditure aggregating to approximately Rs 4,000 crore.

Interim direction
Given the quantum of tax involved and the zeal of the tax authorities to collect it, Nokia has went to the Delhi High Court seeking directions for restraining the tax authorities from taking coercive measures to recover the disputed tax demand and giving them adequate time under law to respond to the authorities. To which the court agreed till disposal of the appeal by the first appellate authority (Commissioner —Appeals). The court also directed the Commissioner (Appeals) to dispose of the appeals by May 31, 2013. Post dismissal of appeals by the Commissioner (Appeals) in favour of the revenue, the matter is currently subjudice before the Income Tax Appellate Tribunal (the second appellate authority).

In the interim, the tribunal directed Nokia India to deposit approximately Rs 7,000 crore in monthly instalments of Rs 50 crore. However, in September 2013, the tax authorities provisionally attached Nokia India’s assets and bank accounts. This, apparently, was prompted by Nokia India’s action of having distributed Rs 3,500 crore as dividend to its parent, Nokia Finland, in September.

Nokia India again approached the Delhi High Court to vacate the attachment as freezing over 15 of its bank accounts had crippled its functioning. The court, while restraining Nokia India from alienating its assets in favour of any third party, allowed it to operate its bank accounts. This lent an air of reasonableness and commercial expediency to its order, fully acknowledging that the litigation notwithstanding, business needed to carry on functioning on a day-to-day basis. It also protected the interests of the tax authorities by ensuring that as long as the tax liability was not determined and devolved, Nokia India would not alienate its assets and impair the tax authority’s ability to recover its determined share of taxes.

Another bump
Though the court’s September order facilitated the Indian operations, there was another hiccup in store for Nokia India with the announcement of Nokia’s global sale to Microsoft of its handset business. In a global deal, Nokia decided to transfer its device manufacturing and selling business to Microsoft; that included the transfer of Nokia India’s Chennai facility. Thus, Nokia India approached the court again to facilitate its parent’s effort to consummate the global business transfer deal.

On Nokia India’s second petition to seek modification to the September order of the Delhi High Court, the court in December 2013, allowed Nokia to transfer its Chennai facility subject to a deposit of Rs 2,250 crore in an escrow account and an undertaking to pay any future liabilities including submission of a letter of guarantee from Nokia Finland to cover any shortfalls. Nokia Finland agreed to furnish a letter of guarantee for withholding tax demand; however it expressed inability to take up corporate tax demand on account of the alleged disallowance of any expense in the hands of Nokia India.

Sensible approach
During the course of arguments, the High Court recognised that the tax authorities’ grievances for restraining Nokia India from alienating its Chennai facility was not “baseless or without foundation” given their recent history where a substantial dividend payment had been made out of their reserves, notably for the first time since the incorporation of the company in India.

Having said that, the court also took cognisance of the arguments that in case the Chennai facility was not allowed to be sold as part of the global deal, its standalone value would diminish dramatically as an operating entity, as Nokia was globally exiting the handset business and Microsoft would be more inclined to set up its own facility somewhere else. These were valid apprehensions considering that Nokia India is commercially profitable and is directly or indirectly providing employment to many.

This litigation is yet to conclude but it’s heartening to see judicial intervention with this element of pragmatism. There is so much being made of India’s aggressive tax administration, not without reason, and its implications on foreign direct investment in India. Litigation is part and parcel of any growing economy but what is also worth being lauded is the impartial and, may I reiterate, the pragmatic role of the judiciary in steering these tax proceedings within the constraints of a dynamic business environment where shutting down a business is not an option and being a part of a global sale is a reality!

By Pallavi Bakhru, Director, Grant Thornton Advisory Private Limited.