Know how the Income Tax authorities are creating an obstacle in its bid to sell its Tamil Nadu plant

Nokia's efforts to sell its Chennai plant face another setback as tax authorities have insisted the company provide a guarantee of up to Rs 3,500 crore over an ongoing dispute before a freeze is lifted on assets.

The Finnish company has called on the Prime Minister's Office to help resolve the issue reported The Economic Times.

The income-tax department filed the affidavit in the Delhi High Court a few days ago, said people with knowledge of the matter. The step effectively goes against an agreement between the two that proceeds from the factory's sale would go into an escrow account pending a decision on the Rs 21,153-crore tax row.

A Nokia spokesperson and a company lawyer confirmed to ET that such an affidavit had been filed.

The pact between the two sides was to be presented in the court on April 6, when the matter would come up for hearing. But I-T department's affidavit seems to run counter to this accord.

The move comes as the government has been saying that all efforts were being made to get the factory sold.

"We have started efforts in this direction. The Nokia plant should start functioning again and people will get employment," Prime Minister Narendra Modi said in the Rajya Sabha on March 3.

The move could undermine the government's push to revive India's image among investors globally by putting a stable, nonadversarial tax regime in place. However, it's also not possible for the government to give up on tax proceedings based on retrospective amendments made in 2012 that has led to high-profile disputes with companies such as Vodafone, Cairn India and others, ET reported. "Our main focus at the moment is what we have consistently said since October: with production at Chennai suspended, we call on the government to lift the asset freeze imposed by the tax authorities so we can explore potential opportunities for a sale to a suitable buyer," the Nokia spokesperson said. "The approach of the government will lead to the perception that India is continuing with aggressive tax policies," said Dinesh Kanabar, chief executive of tax advisory firm Dhruva Advisors and former KPMG India deputy CEO. "When the government decided not to go to the Supreme Court on the Vodafone tax case, it sent a very positive signal to the international community, and one would wish that government would be pragmatic. Likewise, in the Nokia case, asking for payment of huge demands which are yet to fructify, will not stand India in a good stead."

Seeking PMO's intervention

Nokia has sought the PMO's "immediate intervention" in resolving the asset freeze issue before the case comes up for hearing next week as "efforts to revive manufacturing operations are in imminent danger of irretrievable break-down", the company said in a letter. The "shocking" approach of the income-tax department will effectively block Nokia India from selling the factory and "we would reach a deadlock", Barry French, head of marketing and corporate affairs at Nokia Corp, said in the note. ET has reviewed a copy of the letter. "We strongly believe that such an undertaking demand is counter to the spirit of cooperation which has been arrived at under your guidance," Nokia said in the letter.

Essar Group Chairman Shashikant Ruia said on Wednesday that the group was evaluating the Nokia factory, confirming the conglomerate's interest as reported by ET on March 18. Nokia, which was once the largest handset maker in the world, said, "Discussions with a prospective buyer are at an advanced stage, and any delays would have the inevitable effect of scaring away the prospective buyer, apart from creating further negative sentiment in the broader investor community."

The letter, which has been copied to several departments, added that the deadlock will further devalue the asset — currently pegged at Rs 350-450 crore — and slash eventual revenue for the government. Nokia Corp is not a guarantor for Nokia India Pvt Ltd's liabilities and is not in a position to accept becoming one as a consequence of this transaction, the Helsinkibased-firm said.

The company said the tax department's guarantee demand is the same one that forced Nokia to keep it out of the $7.5-billion global sale of its devices business to Microsoft in April 2014. This led to the closure of the plant and rendered about 8,000 direct employees and thousands of indirect workers jobless.