Delhi HC unfreezes Nokia's Chennai plant

The Delhi High Court has accepted an appeal by Finnish mobile phone maker Nokia to release its Chennai plant, which was seized by income tax authorities over the company's tax dues (See: IT department rejects Nokia's Rs2,250 crore offer against tax liability), thus clearing a hurdle to the sale of the company's mobile phone business to Microsoft Corporation.

The High Court has allowed Nokia's plea to lift the freeze on the plant, facilitating its transfer to Microsoft on the company depositing Rs2,250 crore ($367.17 million) in an escrow account as a condition.

However, the case over the tax demand will continue separately. If Nokia loses the case, the Finnish company will have to pay up to $3.4 billion, including penalties and interest on the tax dues.

The Chennai plant, which turns out a million handsets annually, is Nokia's largest manufacturing facility outside Europe and is part of the sale deal with Microsoft.

Nokia's 8,000-employee factory in Chennai manufactures 20 different mobile phone models and provides a large source of revenue for the devices and services operation that was sold to Microsoft in September.

Nokia had appealed the seizure of the plant and was disparately seeking an end to the tax dispute in order to save the €5.4 billion ($7.4 billion) Microsoft deal.

Reports had earlier said that Nokia Corp was prepared to set aside a large sum of cash in return for the release of its Indian assets, in a bid to find a temporary solution to a tax dispute with Indian authorities so that it can close the sale of its handset business to Microsoft Corp(See: Nokia offers to set aside more cash against Indian tax demand).  

Since the tax dispute remains unsolved, Nokia's Chennai facility will not be part of the assets transfer to Microsoft, and Nokia will be have to remain in the mobile device business as a contract manufacturer for Microsoft for a transitional period for the deal with Microsoft to close.

"It's a very fair and balanced order," said NP Sahni, a lawyer for the tax department. "It substantially protects the interest of the revenue (department) and also enables Nokia to go ahead with its proposed deal with Microsoft."

Nokia did not react. A spokesman for Nokia in Helsinki said the company would comment after analysing the ruling.

If Nokia loses the legal battle, its total tax liability in India could be nearly 10 times the amount it has agreed to deposit as a guarantee.

Nokia is one of several high-profile foreign companies in India, including IBM, Royal Dutch Shell, Vodafone and LG Electronics, which owe huge sums in tax avoided and the government is pushing tax authorities to recover the huge tax arrears to help rein in the government's bulging budget deficit.