New Delhi: Finnish mobile phone maker Nokia Oyj’s Indian unit, the latest company to get hit with a tax notice by revenue officials, said on Thursday that it had secured a temporary stay from the Delhi high court on the Rs.2,000 crore claim it intends to contest “vigorously”.
The notice is for tax that should have been deducted at source on money the local unit paid as royalty to its parent, government officials aware of the matter said on condition of anonymity.
“Nokia confirms it has received an order from Indian tax officials,” the company said in a statement. “Nokia reiterates its position is that it is in full compliance with local laws as well as the bilaterally negotiated tax treaty between the governments of India and Finland, and will defend itself vigorously.”
The move by the tax authorities is seen as a part of the government’s efforts to raise revenue in the face of slowing economic growth by clamping down on perceived attempts at tax avoidance by corporate entities.
Shell India Markets Pvt. Ltd, the local unit of Royal Dutch Shell Plc, has announced its intent to challenge an income-tax (I-T) order that accuses it of under-pricing an intra-group share transfer by Rs.15,220 crore.
South Korea’s LG Electronics Inc., Singapore property group Ascendas Pte Ltd, French information technology services firm Cap Gemini SA and chocolate maker Cadbury are among the global companies involved in transfer pricing disputes in India, Reuters reported on 18 February, citing documents at the tax department’s appellate tribunal. These companies have challenged the tax department’s orders, the report said.
Nokia said in its statement on Thursday that it had filed a writ before the Delhi high court last week, and “on Friday, 22 March, the court has issued notice to the I-T department to file its counter-affidavit and has granted interim stay of the entire tax demand raised against Nokia till further orders”.
Tax officials said in an interim report that Nokia should pay Rs.13,000 crore for tax and transfer pricing violations, The Economic Times reported on 13 January.
Transfer pricing is the value at which companies trade products, services or assets between units in different countries, sometimes to avoid taxes.
Tax authorities have alleged that Nokia’s Indian subsidiary had been downloading software from its parent firm used in the manufacture of mobile handsets at its Sriperumbudur factory in Tamil Nadu. The Indian subsidiary paid royalty on the software, which attracts a 10% tax to be deducted at source.
The tax department in January raided the factory near Chennai and offices of Nokia’s Indian subsidiary in Gurgaon, on the outskirts of Delhi.
The Sriperumbudur factory is one of the largest production facilities for the device maker out of eight it has in the world. It has manufactured more than 500 million mobile phones in the past five years and employs over 8,000 people.
The effort to clamp down on perceived tax avoidance comes at a time when India is attempting to raise revenue to plug its fiscal deficit. Data released by the Controller General of Accounts on Thursday showed the government had met only 77% of its revised tax collection target in the first 11 months of the fiscal year to 31 March. The fiscal deficit target was at 97.4% of the revised estimate in the April-February period.
Tax revenue, at Rs.5.71 trillion, is substantially lower than the revised estimate of Rs.7.42 trillion in the fiscal year, making the tax department scramble to meet targets in March.
In its budget for 2013-14, the government had lowered the revised tax revenue estimates by nearly Rs.30,000 crore as slowing economic growth hit corporate tax and excise duty collections.
“The tax collection targets are much beyond what the revenue department is being able to collect. This obviously means that they will increase their scrutiny on transactions,” said B.M. Singh, a former chairman of the Central Board of Direct Taxes. “The tax department has gone overboard with respect to certain transfer pricing transactions. In Shell’s case, there is a capital infusion but no income element.”
“With these kind of instances, foreign investors will do a rethink while investing in India. We need a more certain tax regime since tax is an important criteria for determining the business environment,” he said.
In addition, retrospective amendments to tax laws governing the indirect transfer of shares continue to worry investors. In last year’s budget, the government sought to retrospectively tax indirect transfer of shares when the underlying assets are in India to counter the Supreme Court judgement that ruled that Vodafone was not liable to pay tax in India
Vodafone International Holdings BV, a Dutch-registered unit, bought the Indian business operations of Hutchison Telecommunications International Ltd (HTIL) through the sale of a Cayman Islands-based firm called CGP Investments (Holdings) Ltd, a unit of HTIL, also incorporated in the Cayman Islands.
The tax department estimated the phone company’s tax liability at more than Rs.11,000 crore. Vodafone and the Indian tax authorities have gone to court to resolve the issue.
The tax department questioned officials, also in January, of audit and accounting firm PricewaterhouseCoopers, which scrutinizes the accounts of Nokia India.
“Since establishing the Chennai factory in 2006, indeed since starting business operations in India in the mid-1990s, Nokia has been scrutinized by the authorities regularly, and its policies have been validated by the Indian and Finnish tax authorities in the normal course of tax proceedings,” Nokia said in its statement. “Nokia remains willing to cooperate fully with Indian tax authorities in accordance with all applicable laws. Nokia has enjoyed a long and fruitful relationship with India, and looks forward to a prompt and just resolution to this matter.”
Some Europe-based multi-national companies have even made informal enquiries about invoking the bilateral investment promotion and protection agreements that India has with other countries, Mint reported on 18 March.