Nokia’s tax troubles in Indian only seem to worsen. While the transfer of Nokia India’s Chennai factory to Microsoft with which it announced a $7.2-billion deal in September 2013 has been virtually thwarted by court-imposed stringent conditions, the income tax (I-T) department has now ordered a special audit of the accounts of the Finnish handset manufacturer’s local subsidiary for assessment year 2010-11.
The special audit against Nokia India would be a comprehensive one, as the department suspects “considerable suppression” of income by the firm, sources said. Scrutiny of transactions between Nokia India and Nokia Finland will be part of the audit, they added.
Nokia India’s troubles with Indian tax authorities began last year when the department initiated a probe against the company for making remittances to its parent company as “payment for supplying software” since 2005-06. Since then, the tax demand on the company has risen to a massive R21,000 crore.
Additionally, Nokia is grappling with another R2,400-crore value-added tax notice slapped by the Tamil Nadu government.
Sources said the special audit under Section 142 (2A) of the Income Tax Act has been initiated on the grounds that “there are several defects, anomalies, discrepancies and irregularities” (in the accounts of Nokia India). As per the company’s profit and loss account for assessment year 2010-11, it declared gross receipts of R26,000 crore against which expenses of approximately R25,000 crore have been claimed. The taxable income stated by the company in its return for the said year amounted to R694.97 crore.
The department, after granting the local handset manufacturer an opportunity to state its case against a notice stating why a special audit can’t be initiated, dismissed its contentions and passed an order on March 28 deputing a reputed chartered accountancy firm to carry out the audit, asking it to complete the same in 120 days.
As reported by FE earlier, in an order on March 15, the Supreme Court upheld the Delhi High Court’s December 12 order imposing 16 conditions for the transfer of the Chennai plant to Microsoft.
The apex court also asked to tell in detail and convincingly of the valuation of the unit and upheld the HC’s order asking Nokia India to deposit R2,250 crore in an escrow account and its Finnish parent to guarantee payment of up to a maximum of R3,500 crore in taxes, pending resolution of the dispute over the Indian firm’s tax liability.
Nokia India had sought waiver of the conditions arguing that any undertaking by its parent firm would have penal consequences in case of default.
The latest move by the I-T department ordering a special audit is on the ground that “verifying the genuineness, correctness, admissibility, appropriateness of such large turnover and details of expenses spanning over thousands of papers and running into lakhs of entries in the books of the account is a voluminous, time consuming and highly complex task that requires the expertise of specialists to bring out the nature, method of allocation amongst different units (some of which are claimed as fully tax exempt), their accuracy and consistency”. The wide-ranging audit order gives a total of 13 directions to the CA firm, calling upon it to examine nature of expenses, compliance with TDS provisions, inventory of handsets, deductible expenses of the company, sales of goods, sales reversals, income from services, visitor register records of the company, along with Nokia India’s international and domestic transactions with its parent company and sisters concerns, sources said.
The CA firm will examine whether the firm can be said to have “maintained books of accounts and financial statements on the basis of which correct profits can be allowed as deductions” under the provisions of the Act. Along with this, the firm will probe if the company has “fulfilled all the necessary conditions for allowance of deduction under Section 10 A and Section 10AA, including realisation of export proceeds and computation of unit-wise profits”.
The parent company and sister concerns of Nokia India will be put under the scanner as the auditor will call upon the local handset major to furnish information on the type of services it renders to its affiliated companies. Details and documents on payments received and/or receivable by the firm from its parent company will also be demanded by the auditor, the sources added.
The auditor has been directed that if in the course of his audit he comes across “any other issue, which he ought to bring to the notice of the Assessing Officer, he may do so”. However, the auditor would “refrain from commenting on the admissibility and deductibility of expenses”. The liberty to decide the same has been left to the assessing officer.
Kaushal Shroff/The Financial Express