Nokia Says 'Very Strong Likelihood' India Plant Won't Be Part of Microsoft Deal -- Update

By Sven Grundberg and Jai Krishna 

Unable to solve a tax dispute with Indian tax authorities, Nokia Corp. on Thursday said it is unlikely that it would be able to include a massive phone plant in India in a wider deal to transfer its phone business to Microsoft Corp.

Nokia and Microsoft expect to formally conclude the transfer valued at 5.4 billion euros ($7.5 billion), on April 25, and the fate of the 8,000-employee phone plant in India's southern state of Tamil Nadu has been a question mark.

On Thursday, Nokia spokesman Brett Young said there is a "very strong likelihood" that it won't be able to include the factory in the wider deal. Mr. Young noted that there is little time before the deal closes, and that it would be "surprising" if the issue were resolved before Friday.

The factory, which produces more than a dozen basic Nokia phone models including some in its Asha range, has been frozen by Indian authorities since late last year. The Indian tax department alleges that the Finnish company has wrongfully claimed tax exemptions on software exports. Nokia, meanwhile, disputes the claim.

Excluding the factory from the transaction won't affect the commercial terms of Nokia's deal with Microsoft, Nokia has said. Including the Indian plant, approximately 32,000 Nokia employees were slated to be transferred to Microsoft.

In the event the factory isn't included in the larger deal with Microsoft, Nokia has said it would be forced to enter into a service agreement with Microsoft to continue to make phones for the company during "a transitional period."

Two people familiar with the development said Nokia has already offered Microsoft a services agreement, under which it would continue to make phones for Microsoft for a year, even as it is talking to the Indian authorities to sort the dispute.

Microsoft and Indian tax officials weren't immediately available to comment.

Earlier this week, Microsoft said it has made a few adjustments to the original terms of the Nokia transaction, and that it wouldn't be taking over a smaller Nokia manufacturing facility in Masan, South Korea, which is involved in the production of Nokia's smartphones. Microsoft requested a change in the transaction to exclude the 200-employee factory "due to excess capacity," a Nokia spokesman said.

Write to Sven Grundberg at [e-mail] and Jai Krishna at [e-mail]

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