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New Delhi: In a setback to Indian unit of Nokia Corp., the commissioner of income tax (appeals) has rejected the phone handset maker’s appeal against a 2,000 crore tax demand in a case relating to royalties on software downloaded on devices manufactured at the Finnish company’s Chennai plant.

The decision is likely to lead to a new round of litigation at different levels by Nokia against the tax demand.

“Nokia is disappointed by the decision of the commissioner of income tax (appeals), and will now examine all options open to it. These include taking the case back to the Delhi high court," the company said in a statement.

Nokia’s India unit was served in March with the tax demand for five years starting from 2006-07 in one of several tax disputes involving a foreign company in India.

Nokia had initially approached the high court in March challenging the tax department’s contention that tax should have been deducted at source by the Indian arm on money it paid as royalty to its parent. The tax demand said that Nokia India should have withheld 10% TDS (tax deducted at source) for royalty payments made against the supply of software by the parent company.

The high court had first stayed the order and then asked Nokia to approach the commissioner of income tax (appeals). In addition to legal action being pursued in India, the ministry of finance in Finland has launched the mutual agreement procedure (MAP) with its counterpart in India under the bilateral double taxation avoidance agreement (DTAA) between the two countries to arrive at a mutually agreeable solution, Nokia said.

MAP is a provision under DTAA that allows for the resolution of disputes involving double taxation.

“Nokia will act quickly and decisively to protect its interests," the statement said.

B.M. Singh, former chairman of the Central Board of Direct Taxes, said the dispute resolution will be a long process.

“It is only the first step and Nokia has the option of approaching the appellate tribunal and the high court. Also, if a MAP is initiated under the DTAA, then competent authorities of both the countries will have to sit together and figure out how much tax should be paid in which country," he said.

Nokia reiterated that it was in full compliance with Indian laws as well as the bilaterally negotiated tax treaty between the governments of India and Finland. “Nokia will defend itself vigorously in this case and against any other Indian tax allegations, using all channels available," the statement said.

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