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TMI Blog2013 (12) TMI 613X X X X Extracts X X X X X X X X Extracts X X X X ..... lar clause (1) and (3) is passed to allow sale of assets by Nokia India to Microsoft/Microsoft International subject to fulfilment of certain conditions - Nokia Finland, will receive about Rs.31,000 crores pursuant to the global transfer of hand devices/mobile phones from the Microsoft International - It will continue to exist and operate, even after handset/mobile phone business is sold to Microsoft International as it being a listed company having several businesses and business interests. Nokia Finland, in addition to the undertaking or letter of guarantee already quoted, will file another letter in form of guarantee/undertaking incorporating the terms and conditions and file the said letter/undertaking with the income tax authorities - It will pay the tax dues dues of the company sold out to the extent permissible and recoverable under the provisions of the Act - Partly allowed in favour of assessee. - Writ Petition (Civil) No. 6150/2013 - - - Dated:- 12-12-2013 - Sanjiv Khanna And Sanjeev Sachdeva,JJ. For the Petitioner : Mr. Vikas Srivastava, Mr. J.P. Singh, Mr. Parag Mohanty Ms. Leenshwari Makhijani and Ms. Varsha Bhattacharya, Advocates. For the Respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rg, 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. 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 anticipated demand as mentioned above comes to Rs. 3997 crores apart from an existing demand of Rs. 654.18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken. Commissioner (Appeals) should dispose of the appeals as early as possible and latest by 31st May, 2013. 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing 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 Microsoft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontinue, 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 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 materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 outsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icant, 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 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 applican ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttachment 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 26th 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 furn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax demands determined and payable by Nokia Finland. Respondents can insist that the escrow account shall be first adjusted or appropriated towards demand 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 ..... 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