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ASuresh (name changed) was engaged in January. He was less educated than his fiancee but her family agreed to the match because he was an employee of Nokia at its Sriperumbudur factory, and would soon be on the rolls of Microsoft. (The Redmond-headquartered company had announced in September that it would buy Nokia's devices and services business for euro 5.44 billion.) These days, Suresh walks around in a daze, unsure if his job is safe. If the job goes, his marriage will be in the doldrums.
That's because the Supreme Court on Friday ordered Nokia to give a guarantee of Rs 3,500 crore before it transfers the Sriperumbudur factory to Microsoft. It is not clear if Nokia will cough up this money. After the Supreme Court order, the company said it was "disappointed" and regretted "the anxiety caused to its employees" but refused to disclose its next step. The deadline for the transfer to Microsoft expires on March 31. After that, Nokia will either have to operate the plant as a contract manufacturer or look for a buyer.
| NOKIA'S INDIA JOURNEY |
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The Sriperumbudur factory is not an insignificant asset. The plant last financial year produced 800 million handsets, which makes it the largest handset factory in the country. While its turnover is not known as the company does not give year-wise break up of revenue, for Microsoft, the deal without the Sriperumbudur factory would make little sense.
Nokia Chairman and Interim CEO Risto Siilasmaa last month met Union Commerce and Industry Minister Anand Sharma to discuss the matter. After the meeting, he said if the company is not allowed to transfer the Sriperumbudur factory to Microsoft, it will not have a business and if it doesn't have a business, it can't manufacture anything in the factory. "And that would be detrimental to our employees," he had said. At the moment, uncertainty prevails - the fate of even the proposed Rs 250-crore investment in the factory is unclear. All told, there are 8,000 employees at the factory - another 25,000 work in ancillary units which supply parts to the Sriperumbudur plant.
Taxing times
The Supreme Court order is the culmination of the standoff between the income-tax department and Nokia that began in January last year. The department had slapped a demand of Rs 21,000 crore on Nokia for violating withholding tax norms since 2006 while making royalty payments to the parent company in Finland. Nokia, for its part, said the demand was highly inflated. The department froze Nokia's assets in India, including the Sriperumbudur factory, fearing that the company could wrap up its India operations without paying the taxes. However, in December, the Delhi High Court ordered the department to unfreeze the assets and put in place a number of conditions, including a payment of at least Rs 2,250 crore in an escrow account by Nokia, as a safeguard against any default.
Nokia appealed against the Delhi High Court order in the Supreme Court and said it was willing to deposit Rs 2,250 crore in an escrow account, or even a higher amount that it will receive from Microsoft for the Indian assets, but a bank guarantee or undertaking for future demands was not possible. However, the Supreme Court, while dismissing Nokia's appeal last Friday, directed Nokia to give a guarantee of Rs 3,500 crore before it transfers the Sriperumbudur plant to Microsoft.
For the company, the problem is enormous. The sale to Microsoft cannot happen till the income-tax department gives a no-objection certificate. But that it is unlikely to do till Nokia gives the bank guarantee. "It has been agreed that in case the necessary approvals are not received, Microsoft shall not purchase the Indian assets," the Delhi High Court said in its order. The important question is: Can Nokia run the plant without Microsoft? It is possible for the Sriperumbudur factory to become a contract manufacturer for Microsoft, but in no event shall this arrangement continue beyond 12 months from the closing of the global deal between Microsoft and Nokia, according to the details contained in the Delhi High Court order. It leaves Nokia with no choice but to find another buyer for the factory. But experts doubt if this is a workable long-term solution. That's because handsets is a high-technology business and as Nokia has decided to exit the sector, the factory will be left with no technology support.
| Workers stare at an uncertain future |
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The uncertainty has begun to take its toll on the workers. A shattered M Saravanakumar, president, Nokia India Thozhilar Sangam, an organisation which claims to have the support of about 4,800 employees, says: “In the last seven years, we have worked hard and put all our efforts and life to make this manufacturing unit number one (for Nokia) globally. We will fight to death to protect this factory”. Earlier, he had expressed disappointment over the way Nokia handled the entire issue. “We are not satisfied with the management and the way it handled the whole issue.” While doubting if Nokia presented the tax dispute properly to Microsoft, Saravanakumar says the issue should be discussed afresh between Nokia and Microsoft. The workers also say at any cost they will not let the Sriperumbudur factory turn into a contract manufacturer. |
While the company has not spelt out its next course of action, informed sources say the Nokia board is expected to meet sometime this week to discuss the matter. On February 14, Nokia had said the tax disputes are not expected to affect the timing of the closing nor the material deal terms of the anticipated transaction between Nokia and Microsoft, announced on September 3, 2013. “The transaction is still expected to close in the first quarter of 2014, subject to regulatory approvals, irrespective of the proceedings in the Indian tax case”. Back home, workers are planning to knock the doors of the J Jayalalithaa-led All India Anna Dravida Munnetra Kazhagam government in Tamil Nadu for help. The Jayalalithaa government has managed to resolve some labour crises in the state, the most recent one being in the state-owned Neyveli Lignite Corporation. But the real question is, what the state government, which keeps alleging that New Delhi has sidelined Tamil Nadu, could do in this matter as income tax is a Centre subject? Analysts say the Jayalalithaa may choose to interfere in the matter as the general elections are round the corner.
Part of a trend
Nokia's case is one of several high-profile tax disputes involving foreign companies in India. Vodafone, IBM and Royal Dutch Shell are among the foreign groups contesting local tax claims. These cases have created a "caution approach" scenario on the minds of global investors. Martijn Blanken, president and managing director of satellite services firm Telstra Global, recently said that "everyone wants to be in India, but what Vodafone has experienced, and what Telenor has experienced, is putting a bit of caution in the minds of foreign telcos, including ourselves."
Opinion on the matter seems divided. Daksha Baxi, executive director, Khaitan & Co, one of the country's leading law firms, says: "The income-tax department is trying to protect the erosion of its tax base. It would be very unfair to put India in a bad light on this. It is the sovereign duty of the country to protect its tax base. Would it have been better if India had formed a Parliamentary Committee to probe into such cases as was done in the UK earlier with Starbucks, where due to public pressure they paid a larger amount of tax to the exchequer despite the computed tax being low?" Girish Vanvari, co-head of tax at KPMG, says that the issues related to tax disputes have created a lot of uncertainty in the investor community and they are wondering whether they are adequately protected or not. On the Nokia issue, he says once the demand is raised, the government will do anything to protect it. "But the real question is the validity of the demand, and whether the demand is legitimate or not," he says.
