By Sumeet Chatterjee and Ritsuko Ando
NEW DELHI/HELSINKI (Reuters) - Nokia has won an appeal to release a local factory seized by authorities in a tax dispute, allowing the transfer of the plant as part of the sale of its mobile phone business to Microsoft.
The plant in the southern city of Chennai is one of Nokia's biggest phone-making factories. Nokia had appealed its seizure and was trying to resolve the dispute ahead of the closure of the 5.4 billion euro ($7.4 billion) Microsoft deal.
Nokia had wanted the asset freeze to be lifted by December 12 to enable the transfer of ownership to Microsoft.
But the tax dispute is still ongoing and if Nokia loses it may have to pay as much as $3.4 billion, including penalties for non-payment of tax and interest, according to a tax department lawyer.
The Delhi High Court asked the Finnish company to deposit 22.50 billion rupees ($367.17 million) in an escrow account as a condition for lifting the freeze and transferring the facility to Microsoft.
Nokia's case is one of several high-profile tax disputes involving foreign companies in India, which has stepped up its pursuit of claims against such firms as it seeks to rein in its budget deficit.
Other foreign firms recently involved in tax disputes in India include IBM, Royal Dutch Shell, Vodafone Plc and LG Electronics Inc.
An extended asset freeze as a result of the dispute would have blocked Nokia from transferring ownership of the Chennai plant, possibly forcing it to operate as a subcontractor for Microsoft.
"There was the question, if Nokia couldn't sell this factory what should it do? Should they sell it later or should they be a subcontractor? This was some kind of uncertainty," said Pohjola Markets analyst Hannu Rauhala. "But of course, we still don't know how much Nokia has to pay."
A spokesman for Nokia in Helsinki said the company would comment after analyzing the ruling.
"It's a very fair and balanced order," said N.P. 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."
In March, Nokia was served with a tax demand for about 20.8 billion rupees covering five fiscal years starting from 2006-07, according to a notice on the Delhi High Court website.
Including the anticipated liability, or the tax bill for the years that have not been assessed by the authorities, the total liability could be roughly 75 billion rupees, Mohan Parasaran, a lawyer representing the tax department, said on Wednesday.
If Nokia loses the legal battle, its liability could total 210 billion rupees, which includes penalties and interest, Parasaran said. He declined to give additional details.
Nokia shares, which had fallen over 2 percent earlier in the day on uncertainty about the case's outcome, were flat by 1145 GMT. They have risen over 90 percent since the Microsoft deal was announced in early September.
($1 = 61.2800 Indian rupees)
(Additional reporting by Nigam Prusty; Editing by Kim Coghill and Jane Merriman)