Nokia won't hand India smartphone factory over to Microsoft

The plan was among assets frozen by Indian authorities over a tax dispute

Nokia's ongoing tax dispute with Indian authorities has put an end to its plans to transfer a local smartphone factory over to Microsoft, as the software maker finalizes its takeover of the Finnish company's devices and services business..

Microsoft's roughly US$7 billion acquisition of Nokia's phone business is set to close on Friday.

The factory in Chennai in south India was among Nokia assets frozen by Indian federal authorities in a dispute over taxes for mobile phone software licenses. Production at the factory was allowed to continue.

A Nokia spokeswoman said Thursday that it was decided that the factory will not be part of the deal for now and the company will instead enter into a services contract with Microsoft.

The plan is an interim measure until the tax matter is resolved, she said. She declined to comment on recent reports that Nokia was planning to sell the factory, dismissing them as speculation.

Microsoft said Monday that its agreement with Nokia had been modified to exclude a factory in South Korea which will continue with Nokia. Twenty-one Nokia employees in China will now join Microsoft to work on mobile phones.

Nokia had offered to deposit into an escrow account an amount larger than the US$340 million tax claim, but the Delhi High Court asked it to hike that figure by another $570 million toward possible future tax liabilities, as a condition to release the factory. The court had earlier released the company's bank accounts in India.

The company also faces a sales tax claim from the state of Tamil Nadu where the factory is located. Nokia has contested the claim in the local High Court, stating that no sales tax can be levied on exported products. The state government claimed that devices made at the factory were not exported but were instead sold domestically.

Microsoft said it had no comment on the news about the Nokia plant in India.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com

This story, "Nokia won't hand India smartphone factory over to Microsoft" was originally published by IDG News Service Bangalore Bureau .

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