* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ WRIT PETITION (CIVIL) NO. 6150/2013
Reserved on: 11th December, 2013
% Date of Decision: 12th December, 2013
NOKIA INDIA PRIVATE LIMITED .... Petitioner
Through Mr. Vikas Srivastava, Mr. J.P. Singh,
Mr. Parag Mohanty & Ms. Leenshwari
Makhijani and Ms. Varsha Bhattacharya,
Advocates.
versus
ADDL. COMMISSIONER OF INOCME TAX & ANR. .. Respondents
Through Mr. Mohan Parasaran, Solicitor General
with Mr. Sanjeev Sabharwal and
Mr. N.P. Sahni, Sr. Standing Counsel
and Mr. Nitin Gulati, Advocate,
Mr.P. Roy Choudhary, Jr. Standing Counsel.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJIV KHANNA, J.
CM No. 15485/2013 (for modification of interim orders dt.26.9.13)
This order disposes of the application filed by Nokia India Pvt. Ltd.
(Nokia India, for short) seeking modification of interim order dated 26th
September, 2013, passed in the aforementioned writ petition.
WPC 6150/2013 Page 1 of 36
2. The writ petition impugns and challenges order dated 25 th
September, 2013, passed by the Additional Commissioner of Income Tax,
Range 13 under Section 281B of the Income Tax Act, 1961 (Act, for
short). The impugned order records that in the interest of Revenue, the
following assets, properties and bank accounts of Nokia India stand
provisionally attached:
2.6 In view of the above, I am of the considered
opinion that for the purpose of
protecting the interests of revenue, it is necessary to attach
provisionally u/s 281B of the Income Tax Act, 1961 the
following assets/properties/bank accounts of the assessee
company, for which prior approval has been accorded by the
Commissioner of Income Tax, Delhi-V, New Delhi vide letter
F. No. UT/Delhi-V/2013-14/1390 dated 24.09.2013:-
A. All book debts including Trade Receivables, Short
Term Loans & Advances and
Long Term Loans & Advances appearing in the books of
accounts of the assessee company as on date.
B. Ownership/Leasehold rights in respect of the
following immoveable properties
including land and building to the extent of the interest of the
assessee company in the property :-
(i) No. A-1, Nokia Telecom SEZ, S1PCOT Industrial Park,
Sriperambudur, Chennai, Tamilnadu -- 600 001.
(ii) No.4, Nokia Telecom SEZ, Phase-3, National Highway
No. 4, Sriperambudur, Chennai, Tamilnadu 600 001.
(iii) 392/1, Green Gardens, Anna Nagar East, Chennai,
Tamilnadu -- 600 001.
WPC 6150/2013 Page 2 of 36
(iv) No. 2-A, Jupiter Block, 3rd Floor, Prestige Tech Park,
Marathalli, RNG Road, Bangalore, Karnataka -- 560 001.
(v) 1st & 2nd Floor, Tower A, SP lnfocity, Industrial Plot No.
243, Udyog Vihar, Phase 1, Dundahera, Gurgaon -- 122
016.
(vi) 5F, Tower A&B, Cybergreens, DLF Cybercity, Sector
25-A, Gurgaon.
(vii) 2nd Floor, A Wing, Commercial Plaza, Radisson Complex,
Mahipalpur, New Delhi.
(viii) Flat No. 1204, 12th Floor, Kailash Buiding, Kasturba
Gandhi Marg, New Delhi -- 110 001.
(ix) Unit No. 123, Building No. 2, Millenium Biz Park, Sector-
1, Mahape, Navi Mumbai, Maharashtra 400 612.
(x) Any other immoveable asset in the nature of land and
building owned/teased by the assessee company other than
those mentioned above.
C. Plant & Machinery located at any of the properties
mentioned at B. above.
The attachment is effective from 25th September, 2013 till 24th March,
2014. Contents of this order will be referred to subsequently.
3. Nokia India, a subsidiary of Nokia Corporation, Finland (Nokia
Finland, for short), was incorporated on 23rd April, 1995. Nokia India
was/is primarily engaged in manufacture and sale of mobile devices/
phones. It has a factory in Chennai employing about 8000 persons.
During the period 2005-06 to 2011-12, it had cumulative turnover/sales
of Rs.150700.44 crores.
WPC 6150/2013 Page 3 of 36
4. Income earned by Nokia India being a resident in India, is taxed in
India. Nokia Finland, being a resident of Finland is primarily taxed in
Finland. Nokia India has paid about Rs. 2181 crores as corporate tax
during the Assessment years 2001-02 to 2012-13.
5. On 8th January, 2013, survey under Section 133A of the Act was
conducted at Chennai and report of Director General of Income Tax
(Investigation), Chennai, the respondents submit, records that significant
defaults were noticed. Assessment for assessment years 2006-07 and
2007-08 stands reopened. Proceedings have been initiated by issuing
notice under Section 143(2) of the Act for the Assessment years 2009-10
to 2012-13. Impugned order records that action under Section 148 was
contemplated for the assessment year 2008-09. On question of estimated
tax liabilities and assets of Nokia India, the impugned order u/s 281B of
the Act, records:-
2.2 Estimated position of demands likely to arise in
the above-referred proceedings is as follows:
S.No. Asstt. Estimated Estimated Major Issues on
Year Additions to Demand which additions are
Returned anticipated on
Income (in Rs. crores) account of Survey
1 2006-07 (in Rs.
15.15 5.00 findings
Disallowance u/s 40(a)(i) of
2 2007-08 crores)
1484.30 499.00 the Act is anticipated on
account of non-deduction of
3 2009-10 2336.51 786.00
TDS u/s 195 on royalty
4 2010-11 2770.59 933.00
WPC 6150/2013 Page 4 of 36
5 2011-12 3693,90 1243.00 payments for software
6 2012-13 1577.33 531.00 licensing representing the
payee's income deemed to
accrue/ arise in India u/s
9(1)(vi) of the Act, being
Total
3997.00 projected as raw material
Demand
purchased by the assessee
company.
The above mentioned estimated additions do not include additions
on the basis of transfer pricing adjustments, adverse findings in
respect of which have also been noticed during the course of
survey u/s 133A as referred to above. Besides, the quantum of
demand will increase further once the interest u/s 234A/B/C of the
Income Tax Act and penalty as applicable is also levied in the
case of the assessee company.
2.3 Position of assets of the assessee company as on
31.03.2012 is as follows:
Balance/Value
S.No. Asset
(in Rs. crores)
1 Total Fixed Assets 586.30
2 Inventories 928.60
3 Trade Receivables 6592.20
4 Cash and Bank Balances 1642.20
5 Short Term Loans & Advances 102.20
6 Long Term Loans & Advances 580.40
Total 10431.90
2.4 Balance Sheet of the assessee company as on 31-03-
2012 shows reserves amounting to Rs. 6220 crores. The
assessee company has distributed Rs. 3500 crores as
dividend out of its reserves as well as paid Rs. 595 crores
as Dividend Distribution Tax. Thus, the cumulative outgo
of Rs. 4095 crores is anticipated to have brought down the
balances available with the assessee company in the form
of cash and bank reserves as well as trade receivables. At
the same time, the assessee company has current liabilities
of Rs. 4491.60 crores in the form of trade payables and the
other current short term provisions and liabilities. After
excluding the figures of cumulative outgo on account of
dividend distribution and the current liabilities of the
assessee company, the assessee company would be left
with assets of nearly Rs. 2000 crores. As the figures
mentioned above pertain to the previous financial year, the
possibility of the availability of assets being even lower as
on 31.03.2013 cannot be ruled out. As against this, the
WPC 6150/2013 Page 5 of 36
anticipated demand as mentioned above comes to Rs. 3997
crores apart from an existing demand of Rs. 654.18 crores.
Thus, it appears that the assessee company does not have
adequate assets to recover the anticipated demand.
6. The respondents` claim that they were prompted and compelled to
issue provisional attachment order in light of the fact that Nokia India had
remitted Rs.3500 crores as dividend to Nokia Finland. This fact came to
their notice when Nokia India paid dividend tax of Rs.595 crores on 10th
September, 2013, leading to a cumulative outgo of Rs.4095/- crores (the
figure is mentioned in paragraph 2.5 of order dated 25 th September,
2013). The respondents felt and apprehend that Nokia India did/does not
have sufficient assets to meet anticipated tax liabilities on completion of
pending assessments.
7. Some more facts are also relevant. After the survey on 8th January,
2013, proceedings under Section 201/201(1A) read with Section 195 of
the Act were initiated against Nokia India and within a span of two
months on 15th March, 2013, orders were passed in respect of financial
years 2006-07 to 2011-12 raising a total demand of Rs.1912 crores.
Demands in respect of financial year 2006-07, 2010-11 and 2011-12 were
sought to be enforced by curtailing the period of 30 days under Section
156 of the Act, to 5 days. It appears that similar attempt was made in
respect of financial year 2009-10. These orders were made subject matter
WPC 6150/2013 Page 6 of 36
of challenge before the High Court in several writ petitions including
WP(C) No. 2004/2013. By interim order, dated 22nd March, 2013,
relying upon the decision of this court in Sony India Ltd. vs.
Commissioner of Income tax (2005) 276 ITR 278 (Del.), the respondents
were restrained from taking coercive measures, for recovery of demand.
The court also recorded statement on behalf of Nokia India, on
instructions, that they would refrain from transferring or remitting
anything out of India except in the normal course of business till the next
date of hearing. These writ petitions were disposed of, vide order dated
17th April, 2013 with the direction that the demands shall be enforced
after the normal period of 30 days.
8. Subsequently, another set of writ petitions including WP(C) No.
2402/2013 along with applications for stay for recovery of demands
under Section 201/201(1A) were filed. It was directed that till the
pending first appeals are heard by the Commissioner (Appeals) under
Section 246A(1), no coercive measures would be taken. Commissioner
(Appeals) should dispose of the appeals as early as possible and latest by
31st May, 2013.
WPC 6150/2013 Page 7 of 36
9. Commissioner (Appeals) has dismissed appeals of the applicant
Nokia India by orders dated 31st May, 2013. Appeals preferred by Nokia
India are pending adjudication before the Income Tax Appellate Tribunal.
10. On 21st June, 2013, two orders on application for stay of demand
were passed by office of Director General of Income Tax (International
Taxation) and Deputy Director of Income Tax, International Taxation
Circle 2(1), New Delhi. By the first order relating to financial years
2007-08 to 2012-13, it was directed that Nokia India shall pay 35% of the
total outstanding demand of Rs.2080 crores i.e. Rs 700 crores in monthly
installments of Rs.50 crores each, from June, 2013 till December, 2013
and Rs.100 crores, Rs.120 crores and Rs.130 crores in the months of
January, February and March, 2014 respectively. In other words, Rs.700
crores out of the demand will be paid by March, 2014. It is accepted that
payments in terms of the said order are being made. There was no
stipulation or restriction on repatriation of the reserves to Nokia Finland
by way of dividend.
11. In the interim order dated 26th September, 2013, we noticed that the
bank accounts of the applicant (15 in number) had been provisionally
attached in addition to all book debts including trade receiveables, short
term loans and advances, long term loans and advances. Learned
WPC 6150/2013 Page 8 of 36
Counsel for the applicant had pointed out that Nokia India has huge
investments in India and total value of fixed assets was Rs.586.30 crores.
Thus, attachment had brought to grinding halt banking operations of
Nokia India or for that matter paralyzed and crippled the entire business
activity. Garnishee notices were issued. Nokia India had submitted that
valuation of assets and liabilities in India by the break-up method did not
reflect true and correct valuation. Nokia India wanted to continue
manufacture, sales and exports from India. In fact about 50% of Nokia
hand-sets were manufactured in India and 40%/50% of the production
was exported. Nokia India asserted that they had no intention or desire
to close their operations in India. Referring to future projected demand
under Section 40(a)(i), it was submitted that it would be duplication.
Keeping in view and recording the aforesaid facts, the following interim
directions were issued:
11. Noticing the fact that the petitioner is an operating and
a running company, we pass the following interim order till
the next date of hearing:
(1) The petitioner will not surrender the lease hold rights or
transfer the ownership rights in respect of any of the
immovable asset or transfer the fixed asset to any third
person.
(2) The petitioner will be entitled to receive debts
created receivables, loans and advances but the amount so
WPC 6150/2013 Page 9 of 36
received will be deposited in the bank accounts mention in
sub-para D of para 2.6 of the impugned order.
(3) The petitioner will not transfer, sell or alienate movable
plant or machinery located in the immovable properties
mentioned in Clause B of para 2.6 of the impugned order.
(4) The petitioner will be entitled to operate the bank
accounts in normal course of business and will file monthly
statement of bank accounts with the assessing officer in
hard copy as well as by sending details via e.mail at the
address which may be provided by the assessing officer to
the petitioner.
(5) The petitioner before repatriating any money abroad will
inform the assessing officer atleast two working day in
advance. The assessing officer, in case, finds the transfer of
money concerning or questionable, he will be at liberty to
approach this Court for appropriate orders.
(6) No dividend will be transferred abroad without
permission of the Court till the next date of hearing.
12. At the suggestion of the revenue, learned counsel for
the petitioner will obtain instructions whether any
declaration can be furnished by the foreign principal or a
third party to protect the interest of the revenue in case there
is any shortfall or failure to pay tax arrears.
13. Without prejudice to the rights and contention of the
parties the petitioner will continue to deposit instalments in
terms of order dated 21.6.2013. We clarify that the stand of
the respondent is that the instalments fixed by the said order
have no relation or connection with the impugned order
under Section 281B of the Act which has been passed on the
basis of future demands which may be created in view of
the pending assessments.
12. As noticed above, by the present application Nokia India seeks
modification of the interim directions (1) and (3) inter alia pleading that
Nokia Finland, their parent company has received an offer from
WPC 6150/2013 Page 10 of 36
Microsoft Corporation (Microsoft, for short), a company incorporated in
United States of America for purchase of substantial portion of devices
and services business of Nokia Finland on global basis. Thereupon an
agreement was concluded for sale of Nokia Finland`s substantial portion
of devices and services business at global level to Microsoft International
Holdings B.V. (Microsoft International, for short), a subsidiary of
Microsoft. Relevant extracts of the agreement have been enclosed with
the application and the full agreement was shown to the officers of the
respondents. As per the agreement, Microsoft International had an option
to either purchase the assets, properties, claims and rights of Nokia India
or purchase equity shares of Nokia India held by Nokia Finland. (Equity
shareholding of Nokia Finland in Nokia is attached, but the said
attachment is not under challenge). It is stated that Microsoft
International has decided not to purchase equity shares of Nokia India
held by Nokia Finland and has concluded first and second amendment in
form of Stock and Asset Purchase Agreement dated 14th November, 2013.
It is highlighted that Microsoft International has made it clear that it is
only interested in purchasing assets etc. provided approvals are granted
by the relevant authorities and they are also aware of the liens etc., on the
assets. It has been agreed that in case necessary approvals are not
WPC 6150/2013 Page 11 of 36
received, Microsoft International shall not purchase the Indian assets.
Paragraphs 6(f) to (i) of the application, read:-
f. It has been clearly understood that in case the
purchase of Indian assets does not go through,
Microsoft International would have to reallocate
production volumes of phones to other manufacturing
facilities (outside India, to jurisdictions where it would
as a consequence of the transaction have its own
manufacturing facilities) and this will be achieved
within 12 months of the closing of the global deal
between Microsoft International and Nokia Corp. In the
meantime, if so required by Microsoft International, the
Petitioner/Applicant will act as a temporary transitional
contract manufacturer of phones for Microsoft
International and in no event shall this arrangement
continue beyond 12 months from the closing of the global
deal between Microsoft International and Nokia Corp,
unless Nokia Corp would find another buyer for the
factory.
g. If the Relevant Assets are not transferred to
Microsoft International, consequence will be a gradual
ramp down of the Petitioner/Applicant's device
manufacturing business operations leading to a winding up
of its business operations within 12 months from the
closing of the global deal between Microsoft International
and Nokia Corp.
h. Microsoft International and Nokia Corp urgently
need clarity on whether or not the Relevant Assets can be
transferred to Microsoft International as part of the global
transaction, as this will impact a number of operative
issues on how the business is run and organized going
forward. For this reason, the Amendment specifies a date
(namely 12.12.2013) by which the parties must have final
resolution on this issue.
i. If the liens placed on the assets of the
Petitioner/Applicant have not been released by this date,
Microsoft International will not be able to purchase the
Relevant Assets of the Petitioner/Applicant, and Nokia
Corp will retain the same.
WPC 6150/2013 Page 12 of 36
13. Applicant pleads that technology is the most valuable input in a
mobile phone/device. Similar phones are available at a fraction of the
price but Nokia phones command premium and goodwill because of
superior technology developed and constantly upgraded by Nokia
Finland. However, as Nokia Finland, the holding company is exiting the
said line of manufacturing and sale of mobile phone globally, the
technology will no longer be available. Production and sales in India by
Nokia India will stop. Value of the Indian company i.e., Nokia India will
decline sharply and tangible assets on sale may only fetch fraction of their
value in use. In case Microsoft refuses and does not purchase Indian
assests etc., Nokia India will have no option but to wind up
manufacturing operations within a period of 12 months. Microsoft
International would be at liberty to commence or start production in other
countries. Nokia India has 8000 employees, apart from 25000 people
who are employed in ancillary supplier units etc. In case assets are taken
over by Microsoft International, employees presently working for Nokia
India will become employees of Microsoft International or their
associates. Land, building, plant and machinery of Nokia India is located
on SEZ land, which is incapable of transfer on stand-alone basis. The
assets if sold in such circumstances will not fetch substantial value. The
WPC 6150/2013 Page 13 of 36
applicant has offered to deposit surplus proceeds realized after adjusting
outstanding liabilities and obligations from Microsoft International on
sale of assets in India with a minimum deposit of Rs.2250 crores in an
escrow account to meet liabilities, if any, of the Income Tax Department.
The said deposit will be made within one month of the confirmation of
sale. It is stated that the Income Tax Department will have first lien.
14. The respondents have not accepted the suggestion or offer made by
Nokia India. They have questioned bonafides of Nokia India and Nokia
Finland, alleging that agreement dated 2nd September, 2013 was prior to
the interim order passed on 26th September, 2013 but the said details were
not brought to notice. Decision of Microsoft, not to purchase equity
shares of Nokia Corporation and to rather purchase assets, is a convenient
coincidence and an act of internal collusion between the two. Trigger
date i.e. 12th December, 2013, it is stated that, is wholly irrelevant and the
Revenue cannot be compelled to take a decision in haste without
ascertaining complete facts. Furthermore, Nokia India on 26th September,
2013 had stated that the manufacturing operations would continue,
asserting that 50% of the hand-sets are manufactured in India and were
also exported. They had assured that Nokia India had no intention to
close their operations in India. But, now a different and contradictory
WPC 6150/2013 Page 14 of 36
stand has been taken. It is alleged that term surplus sale proceeds`
coined by Nokia India is vague and fanciful and as per the calculations of
the respondents the figure of Rs.2250 crores is not a sufficient and
legitimate deposit, keeping in mind the existing and anticipated tax
demands and hence, the application does not have any merit and should
be dismissed. Along with reply, the respondents have also filed
annexures R1 to R5 setting out projected tax demands which may be
payable by both Nokia India and Nokia Finland with and without penalty
and interest. We shall refer to the said calculations subsequently.
15. At the outset, we notice that there are apprehensions and
misgivings. The two parties are reluctant to believe and accept the
statements made by each other. This has not helped in resolving the
matter. The grievance and apprehension of the respondents, it is
apparent, is primarily because the applicant had withdrawn from reserves
and repatriated Rs.3500 crores as dividend to Nokia Finland. The said
grievance of the respondents is not baseless or without foundation, inspite
of the contention of the applicant that they had every right to declare
dividend from the profits earned and on which full tax had been paid.
Applicant has submitted that no dividend had been declared and paid
from date of incorporation of Nokia India in 1995 till 2013. Rs.595
WPC 6150/2013 Page 15 of 36
crores was paid as dividend tax to the respondents. The apprehension and
fear of the applicant is that the respondents have been unfair on two/three
occasions when direction was given that the tax demands be paid within 5
days, curtailing 30 days period specified under Section 156 of the Act and
such an action necessitated filing of writ petitions and a stay order. The
apprehension is also founded on the allegation that the orders under
Section 201/201(1A) were passed in great haste and hurry and it is
alleged that the demand as computed includes amount of Rs.3100 crores
for which there was no credit entry in the books of accounts of Nokia
India and no payment was in fact made by Nokia India to Nokia Finland.
Reference is made to the order under Section 281B which virtually had
the effect of seizure of bank operations, dishonor of cheques etc.
16. At this stage, we only record that prima facie we find that there is
partial truth in the allegations made by both sides against each other. In
fact, the oral submissions made on behalf of the applicant at the time of
initial hearing were to the effect that the offer made by them was final,
give it or take it after. It is a favour and if the offer made is rejected,
consequences and warnings as stated will follow. The said statements
have certainly not helped and are completely unexceptionable. As noticed
below, the applicant and Nokia Finland, have benefitted and should not
WPC 6150/2013 Page 16 of 36
be oblivious to the profits made from the India operations. Taxes in India,
as per law have to be and must be paid. Every tax payer or person
residing in India or doing business with Indian residents must comply
with the law, meet their obligation and share their due tax burden. Of
course they are entitled to and will be dealt with fairly and in a just
manner. In subsequent hearings, the applicant has sought to clarify that
the impression given during the earlier hearings was not their intention
and both Nokia India and Nokia Finland firmly believe and hope that
manufacture of devices and Indian operations should be taken over by
Microsoft International.
17. Nokia Finland has substantially benefitted from the sales and
manufacturing activities in India. Nokia Finland had made an initial
investment of Rs.35.6 crores in Nokia India starting in 1996. Thus, in
monetary terms investment by Nokia Finland was not substantial. As per
the details filed, total investment in India by Nokia India has increased to
Rs 1858.95 crores which includes production, work paid resources and
parked assets. These assets have been created from internal accruals i.e.
from profit earned from commercial activities, manufactures, sales and
exports from India. It is apparent that doing business in India has been
extremely profitable and beneficial for Nokia Finland who have received
WPC 6150/2013 Page 17 of 36
dividend of Rs.3500 crores in the current financial year. Nokia Finland
has also commercially benefited from the purchases made by Nokia India
from them and their associated enterprises. Total quantum of purchases
including raw material purchases from Nokia Finland and their associated
enterprises is about Rs.57924.48 crores. This includes assembly to order
and raw material but does not include labour or depreciation. In
comparison Nokia Finland had paid paltry income tax of about Rs 71
crores for the period between 1997-98 to 2007-08. After 2008-09, no tax
has been paid in India by Nokia Finland.
18. At the same time, Nokia India has paid corporate tax of Rs.2181
crores for the Assessment Years 2002-03 to 2013-14. They have also
paid dividend distribution tax of Rs.595 crores. Nokia India directly
employs 8000 employees and indirectly employs about 25000 persons in
India. The total production or sales by Nokia India between 2006-07 to
2012-13 was Rs.150700.44 crores and the total purchases from third
parties i.e., parties other than Nokia Finland and associated enterprises
during this period i.e. Assessment Years 2006-07 to 2012-13 was
Rs.74,447 crores. Nearly 40 to 50% of the hand devices/mobile phones
manufactured by Nokia India were/are exported worldwide. Figures with
regard to indirect taxes in form of excise duty, customs duty, service tax
WPC 6150/2013 Page 18 of 36
or value added tax paid by Nokia India are not available but the said taxes
paid would be substantial and significantly more than the corporate tax
paid.
19. Quantum of tax demand or the project demand before us has been
contested. Respondents during the course of hearing before us had filed
the following chart:
(1) Intl Tax Tax (A) Interest (B) C=A + B Penalty (D) Total (C+D)
(i) NIPL (201 1912 737 2649 1912 4561
+ 201A)
(ii) Nokia Corp 1912 1330 3242 1912 5154
(2) CIT-V
(iii) NIPL 4292* 2000 6292 4292 10584
[40(a)(i)]
Total 12183 8116 20299
(i)+(ii)+(iii)
CIT-V
(iv) NIPL 2274** 995 3269 2274 5543
[40(a)(i)
Total 9160 6098 15258
(i)+(ii)+(iii)
[ALL FIGURES IN Rs.CRORE], *without S.10AA deduction, **with S10AA deduction.
20. The aforesaid figures, it is submitted on behalf of the applicant are
highly debatable, overlapping and inflated to cause prejudice. The
figures do overstate the projected tax demand to some extent. Besides the
respondents presume and assume that they shall succeed on all accounts,
fair and square. The respondents have taken the figure of Rs.1912 crores
twice, as payable by Nokia India as tax at source whereas if this payment
is made by Nokia India, Nokia Finland would not be liable to pay the
WPC 6150/2013 Page 19 of 36
same as tax. Similarly, as noticed above, the applicant has contended that
the total payments made by Nokia India to Nokia Finland for software
has been wrongly enhanced by Rs.3100 crores. This submission gets
support from the details of remittances filed by the respondents before us.
As per the said details Nokia India during the period 1st April, 2006 to
31st March, 2012 has paid Rs.15046 crores to Nokia Finland. If this
figure is taken as correct, then the TDS or tax, if payable, by Nokia
India/Nokia Finland would be about Rs.1600 crores. However, this is
only a prima facie view and not a conclusive firm opinion.
21. In the aforesaid computation, the Revenue has computed addition
which may be made in the assessment/reassessment proceedings of Nokia
India by the Assessing Officer by invoking Section 40(a)(i) of the Act.
The said provision stipulates that if an assessee fails to deduct tax at
source on royalty etc. payable to a person resident outside India or fails to
deposit tax, the amount paid as royalty etc., will not be allowed as an
expenditure while computing income chargeable as profits and gains
from business or profession`. The said expenditure will be allowed as a
deduction in computing income of the previous year in which the said tax
is paid. In nutshell, the effect of the said provision is that Rs.15046
crores paid by Nokia India to Nokia Finland during the period 2006-07 to
WPC 6150/2013 Page 20 of 36
2011-12 would be disallowed as expenditure in the hands of Nokia India,
inspite of the fact that payment was made. This is because Nokia India
had failed and did not deduct tax at source of Rs.1600/1912 crores.
Rs.15046 crores would be allowed as expenditure in the profit and loss
account in the year in which tax at source of Rs.1600/1912 crores is paid.
This is the legal consequence of Section 40(a)(i). However, first the
question and the hurdle which the respondents must meet and cross is
whether the amount paid was royalty as submitted and was not business
income.
22. As per the computation made by the respondents, addition under
Section 40(a)(i) would result in a tax demand of Rs.4292 crores against
Nokia India and interest of Rs.2000 crores on the said demand. Further
if, penalty for concealment under Section 271(1)(c) @100% of the tax is
imposed, Nokia India would be liable to pay another Rs.4292 crores.
Thus making a cumulative total demand of Rs.10584 crores for addition
under Section 40(a)(i) of the Act. Another penalty of Rs.1600/1912
crores can be imposed as per the respondents under Section 271C of the
Act for failure to deduct TDS.
23. As per the computation filed by the respondents, the Nokia India
would be liable to pay interest as noticed above of Rs.2000 crores on tax
WPC 6150/2013 Page 21 of 36
demand of Rs.4292 crores and Rs.737 crores on late deposit of TDS.
Nokia Finland may not be liable to pay tax, if TDS is paid by Nokia
India, but they would still be liable to pay interest as per calculations
made by the respondents of Rs.1313 crores and also penalty under
Section 271(1)(c) of the Act of Rs.1912 crores (amount may be less in
case the tax payable is Rs.1600 crores and not Rs. 1912 crores).
24. The cascading effect of the issue and impact of Section 40(a)(i) of
the Act is apparent. It is a stringent and burdensome provision. However,
in case contention of the respondents is rejected, and the stand of the
applicant, that the payment made was not royalty is accepted, the entire
calculation would be futile and no amount would be payable.
25. In the aforesaid chart, the respondents have also computed figure
of the tax payable by Nokia India after computing tax under Section
10AA. The figure given is Rs.2274 crores. After including interest and
penalty computed under Section 271(1)(c) of the Act, the figure comes to
Rs.5543 crores. In the assessment already made, benefit of the said
Section has not been denied to Nokia India. The computation made by
the respondents itself indicates that substantial production undertaken by
Nokia India, is exported. It is accepted that Nokia India has paid Rs.350
crores in terms of order dated 21st June, 2013 and have to make balance
WPC 6150/2013 Page 22 of 36
payment of Rs.350 crores as per the installments agreed on or before
March, 2014.
26. It is clear from the aforesaid table and computation made by the
respondents that the entire case is based upon their plea and contention
that payments made for software by Nokia India to Nokia Finland of
Rs.15046 crores was taxable in the country at source i.e. India, as it was
royalty for right to use copy right. The stand of the applicant is that this
payment was not royalty for right to use the copyright under the Double
Taxation Avoidance Agreement between India and Finland. We only
note that the issue or the contentions raised by both sides are debatable
and arguable. It would not be fair or proper to give even a tentative
opinion without exhaustive hearings as it might prejudice a party. The
issue however is not new but appears to be recurrent. Order under
Section 201/201(A) refers to decisions on this point including decision of
Delhi High Court in the case of Nokia itself but the adjudicating officer
has not been accepted and applied the ratio. The order refers to
explanations incorporated to Section 9(1)(vi) of the Act by Finance Act,
2012 with retrospective effect from 1st June, 1976/1st April, 2001. The
order also states that the said explanations or definitions can be applied to
construe provisions/articles of Double Taxation Avoidance Agreement.
WPC 6150/2013 Page 23 of 36
Question of limitation etc. have also been raised. Another issue which
arises for consideration is whether penalties can be and should be
imposed under Section 271C or 271(1)(c) of the Act as the defence/plea
of the applicant/Nokia Finland is legally plausible and relates to
interpretation of law. These contentions and issues will have to be
adjudicated and decided in the assessment, penalty and the appellate
proceedings. Assessee`s appeals in respect of orders passed under
Section 201/201(1A) are pending before the tribunal and the decision on
the said aspect will have a relevant and vital bearing on the assessment/
re-assessment proceedings against Nokia India and Nokia Finland. But
the aggrieved party is likely to file appeals before the High Court and
then the Supreme Court. We have referred to the orders and issues raised
to highlight and point the controversy and that the questions and issues
are debatable and will require indepth adjudication. We also do not wish
to express any opinion on merits as this can prejudice to a party.
27. Section 281B of the Act is a provision which permits provisional
attachment in respect of property belonging to the assessee during
pendency of the proceedings for assessment or reassessment when the
Assessing Officer is of the opinion that it is necessary to do so to protect
the interest of the Revenue. He requires permission/previous approval of
WPC 6150/2013 Page 24 of 36
Commissioner/Chief Commissioner etc. The provisional attachment is
effective for a period of six months. But Commissioner or Chief
Commissioner or Director for reasons to be recorded in writing can
extend the aforesaid period provided the total period of extension should
not exceed 2 years. The provision is primarily to protect interest of the
Revenue but has to be exercised with care and caution.
28. We have quoted relevant portion of the interim order dated 26 th
September, 2013. In paragraph 12 thereof, we had mentioned that the
counsel for the petitioner i.e. the applicant, would obtain instructions
whether any declaration could be furnished by the foreign principal or
third parties to protect the interest of the Revenue in case there is any
shortfall or failure to pay tax arrears. During the course of hearing
before us, learned counsel appearing for the applicant was asked to obtain
instructions whether Nokia Finland is ready and willing to furnish any
letter of guarantee to the respondents, which would be also treated as an
undertaking given to the court, in addition to ensuring the minimum
deposit of Rs.2250 crores. Learned counsel has informed us that Nokia
Finland is ready and willing to give letter of guarantee and has furnished
a draft of the same, which reads:
WPC 6150/2013 Page 25 of 36
We, M/s Nokia Corporation, a company incorporated
under the laws of Finland and currently having our offices
at Keilalahdentie 2-4, 02150 Espoo, Finland, state and
affirm as follows:
1. We understand that the Indian Income Tax authorities
have initiated proceedings under Section 201 of the
Indian Income Tax Act, 1961, against M/s Nokia India
Private Limited (NIPL), a company incorporated
under the laws of India and having its current offices at
SP Infocity, Industrial Plot No. 243, Udyog Vihar,
Phase 1, Dundahera, Gurgaon, Haryana 122016 India,
on the ground the NIPL was liable for withholding tax
at source from the payments made to Nokia
Corporation during the financial years 2006-07 to 2011-
12 for purchase of copies of software.
2. We understand that the Indian Income Tax authorities
contend that the said payments constitute royalty under
the provisions of the domestic income tax laws of India
and the Double Taxation Avoidance Agreement entered
into between India and Finland (Indo-Finland
DTAA).
3. We also understand that aforesaid proceedings are
currently pending in appeal before the Income Tax
Appellate Tribunal, Delhi.
4. Nokia has always recognized that its own long-term
interests and those of its various stakeholders depend on
strict adherence to applicable regulation, the Rule of
Law and on following the highest standards of ethics.
As a responsible corporate citizen committed to paying
taxes in accordance with applicable national and
international laws and treaties, we are obliged to pay
the income tax liabilities which may ultimately be
found to be payable by us pursuant to the aforesaid
proceedings after exhausting all legal remedies
available to us and without prejudice to our rights under
the Indo-Finland DTAA (and more specifically Artile
26 of the said DTAA) and any other applicable treaty or
agreement.
5. Signed in Espoo, Finland on 11th December, 2013
WPC 6150/2013 Page 26 of 36
NOKIA CORPORATION
29. During the course of hearing, learned counsel for the applicant
accepted and agreed that Nokia Finland shall make payment of tax,
interest and penalty if due and payable as determined under Section
201/201(1A) and the relevant provisions; the tax liability interest and
penalty of Nokia Finland, if determined, due and payable. They have
expressed their inability to furnish any such letter of guarantee in respect
of tax demand which may become due and payable by Nokia India
pursuant to any assessment or reassessment on account of invocation of
Section 40(a)(i) of the Act.
30. At this stage, it would be relevant to refer to Article 26 of the
Double Taxation Avoidance Agreement between India and Finland which
postulates assistance in collection of taxes due and payable by a State
from a resident of another contracting State. The respondents have
submitted that there may be resistance and obstruction in collection of the
taxes, even if the demand is confirmed and has attained finality.
31. Section 170(3) of the Act relates and deals with succession. The
said provision being statutory will provide some and limited protection to
WPC 6150/2013 Page 27 of 36
the Revenue if the assets are purchased by Microsoft International from
Nokia India. However, we are told that the protection under the said
Section will not be effective and will not cover substantial period and the
amount relatable to the period specified is insignificant.
32. We had asked learned Solicitor General whether the respondents
have valued the assets of the applicant Nokia India. The respondents
were also asked whether they have any alternative plan(s) and what they
intend to do in case Nokia India stops manufacturing or decides to close
down their operations. It was stated that the assets of Nokia India will be
sold but on the question of market value of the assets, the respondents
were silent. It was stated that no such study or examination has been
made. They have not ascertained and visualized the consequences, and
how and in what manner interest of the income tax department is
advantageously protected.
33. As per the order dated 25th September, 2013 under Section 281B,
the total assets of the applicant were valued at Rs 10431.90 crores but the
applicant had liabilities of Rs 4491.60 crores in form of trade payables
and other short term provisions. The applicant had reserve of Rs.6220
crores from which cumulative outgo of Rs.4095 crores on account of
dividend of Rs.3500 crores and dividend tax of Rs.595 crores stands paid.
WPC 6150/2013 Page 28 of 36
In the said order, the tentative/anticipated demand has been computed at
Rs.3997 crores apart from existing demand of Rs.654.18 crores, which is
significantly less and different from demand now highlighted to us in the
chart. We have already commented on the said calculations. It is stated
that in the order under Section 281B after meeting the current liabilities,
the applicant will be left with assets of Rs.2000 crores. It is accepted that
net current assets of the applicant are Rs.2347 crores and the value of the
fixed assets is Rs.586.30 crores (The applicant had protested against the
valuation made by the respondents during the course of hearing on 26th
September, 2013 and submitted that the break-up method was not correct
and was not reflective of true and correct position. Respondents had
pleaded to the contrary. However, now their stands are reverse.)
34. Nokia India, in the manufacturing unit, have directly employed
8000 workers and they indirectly, it is claimed, are providing
employment to another 25000 persons. Their employment is at stake and
this fact cannot be ignored. Neither can we ignore the fact that Nokia
India had repatriated Rs.3,500 crores, though they were aware that there
was a dispute and would be claims of the Income Tax Department. As of
now, the tax demand or issues are inchoate and it may take a considerable
time before the issue is finally settled. Possibly, the dispute will be taken
WPC 6150/2013 Page 29 of 36
to the Supreme Court for final adjudication and this is a time consuming
process. The final outcome is uncertain and not free from doubt. Even if
the matter is decided against Nokia India/Nokia Finland, the quantum of
demand itself in respect of deduction under Section 40(a)(i), interest and
penalty including penalty under Section 271C/271(1)(c) of the Act would
depend upon several factors. These may take their own time to decide.
35. Closing down or keeping out Nokia India, when Nokia Finland is
globally transferring and disposing of their hand devices/mobile phones
business, may not be the sound and considered decision or even in the
interest of the Revenue as there could be sharp decline in the market
value of the assets of Nokia India. There would be a few purchasers and
invariably in such sales, proceeds are frugal. The respondents themselves
are not sure of the market value of the assets and have not undertaken any
calculation or examined what will be the consequences in case Microsoft
International does not take over the Indian assets.
36. Nokia Finland or their affiliates have business all over the world
and there are involved in tax issues or litigations in other countries. Tax
proceedings in India have taken a centre stage. The respondents have
relied upon and referred to the settlement or understanding between
WPC 6150/2013 Page 30 of 36
Nokia Finland or their affiliates with the tax authorities in Brazil. The
applicant, on the other hand, had stated that the figures and details
pointed out by the respondents in their note/chart are incorrect. There is
tax litigation or disputes in Brazil, but Nokia Finland/their affiliates have
furnished bank guarantee from a local bank to the extent of 5% of the
total tax, which is subject matter of dispute. The amount paid is equal to
Rs.320 crores.
37. Nokia Finland, it is stated, will receive about Rs.31,000 crores
pursuant to the global transfer of hand devices/mobile phones from the
Microsoft International. Nokia Finland, it is stated, will continue to exist
and operate, even after handset/mobile phone business is sold to
Microsoft International. Nokia Finland is a listed company having
several businesses and business interests. Nokia Finland, it was averred
but not disputed, has substantial assets and reserves.
38. In view of the aforesaid position, we are inclined to modify our
interim order dated 26th September, 2013, in particular clause (1) and (3)
thereof. We permit and allow sale of assets by Nokia India to
Microsoft/Microsoft International subject to fulfilment of the following
conditions:-
WPC 6150/2013 Page 31 of 36
(i) Nokia Finland will be bound by the statement that they shall be
jointly liable and shall pay tax demand determined and payable under
Section 201/201(1A), interest and penalty thereon.
(ii) Nokia Finland shall be liable to pay taxes including penalty and
interest due and payable by them as determined under the Act i.e. the
Income Tax Act, 1961.
(iii) Nokia India/Nokia Finland will deposit atleast Rs.2250 crores in an
escrow account, details of which will be furnished to the respondents
with one month of the agreement with Microsoft/Microsoft International.
The amount of deposit will go up or increase upon higher consideration
being received from Microsoft/Microsoft International, as per valuation
report.
(iv) Copy of the valuation report will be furnished to the respondents
within 15 days of acceptance.
(v) Rs.2250 crores or the higher amount, which will be deposited in
the escrow account, at the option of the respondents may not be adjusted
or appropriated against tax demands including interest and penalty
relating to TDS/order under Section 201/201(1A) or tax demands
determined and payable by Nokia Finland. Respondents can insist that the
escrow account shall be first adjusted or appropriated towards demand
WPC 6150/2013 Page 32 of 36
pursuant to assessments under Section 143(3)/147 of the Act against
Nokia India.
(vi) In case of an adverse assessment or re-assessment order or tax
demand being created against Nokia India under Section 143(3)/147 of
the Act, the demand will be paid from the escrow account subject to stay
order, if any, against recovery of the said demand from appellate
authority or Indian courts and in case Nokia India pays any amount, or is
appropriated from the escrow account, and Nokia India subsequently
succeeds, the amount will be refunded with interest in accordance with
the provisions of the Act. Interest earned on the escrow account will be
also included in the amount payable.
(vii) Income Tax Department without prejudice to their rights and
without affecting the obligation of Nokia, Finland mentioned in clauses
(i) and (ii) above, can in the case of non-payment, seek
payment/appropriation of Rs.2250 crores or the higher amount in the
escrow account including interest towards dues under Section
201/201(1A), penalty and interest. The said appropriation or payment
would not affect the obligation of Nokia, Finland.
(viii) Nokia Finland, in addition to the undertaking or letter of guarantee
quoted above, will file another letter in form of guarantee/undertaking
WPC 6150/2013 Page 33 of 36
incorporating the terms and conditions mentioned herein and file the said
letter/undertaking with the income tax authorities i.e. Deputy Director of
Income Tax (International Taxation) and Commissioner of Income,
Delhi-V and in this writ petition. This will be treated as undertaking to
the Court. The letter/undertaking will clearly state that Nokia Finland will
abide by clauses (i) and (ii) above and will cooperate in payment of tax
dues payable under Section 201/201(1A) or the dues payable by Nokia
Finland. Copy of the letters/undertaking will be filed by Nokia Finland
with their Government.
(ix) Nokia Finland will not be liable to pay the tax dues of Nokia India,
except to the extent permissible and recoverable under the provisions of
the Act i.e. the Income Tax Act, 1961. However, in case the total amount
due and payable by Nokia Finland in clause (i) is less than Rs.3,500
crores, and Nokia India is unable to pay dues under clause (vi), Nokia
Finland will be liable to pay tax dues of Nokia India upto but not
exceeding Rs 3500 crores. In other words, Nokia Finland will not be
liable to pay tax dues under clause (i), and the present clause exceeding
the figure of Rs.3,500 crores. This amount has been fixed as dividend of
Rs.3,500 crores stands paid by Nokia India to Nokia Finland. Demand
under clause (ii) stands excluded as the said liability is personal to Nokia
WPC 6150/2013 Page 34 of 36
Finland. This limit of Rs.3500 crores does not apply to demand under
clause (i).
(x) Microsoft/Microsoft International will not be liable to pay tax dues
of Nokia India and Nokia Finland, except when any amount due and
payable as per the provisions of the Act.
(xi) In case of non-compliance of clauses (i) and (ii) above or non-
payment of the settled demand in terms of clause (ix), Revenue can
approach the Court for appropriate orders. In such circumstances, the
Court will have the power to take action or directions as may be justified
and appropriate steps to ensure compliance.
(xii) Nokia India/Nokia Finland will continue and pay Rs.700 crores in
installments in terms of the order dated 21 st June, 2013 and this amount
has no co-relation with Rs.2250 crores or higher amount, which will be
deposited in the escrow account.
(xiii) Nokia India/ Nokia Finland will be entitled to contest the income
tax proceedings and demands under clauses (i) and (ii) against Nokia
India/Nokia Finland which can be enforced by the respondents in
accordance with law, subject to right of Nokia India/Nokia Finland to
plead and ask for stay. In absence of stay, demands will be recoverable.
(xiv) It is open to the parties to take recourse to mutual agreement
WPC 6150/2013 Page 35 of 36
procedure or mutually modify the terms and conditions of this order and
approach the Court in case modification or if any clarification is required.
(xv) Attachment of shares of Nokia India held by Nokia Finland is not
subject matter of this order.
(xvi) Other stipulations and directions in the interim order dated 26 th
September, 2013 will continue.
39. The application is accordingly disposed of with no order as to
costs.
W.P.(C) 6150/2013
List on 3rd January, 2014, the date already fixed.
(SANJIV KHANNA)
JUDGE
(SANJEEV SACHDEVA)
JUDGE
December 12th, 2013
kkb/NA
WPC 6150/2013 Page 36 of 36
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