Nokia will suspend handset production at its Chennai facility in India from Nov. 1, the company said on Tuesday.
The plant in Chennai is among Nokia's biggest for making handsets, but has suffered as the company got caught in a tax dispute with the Indian government. Nokia has also suffered as demand for its handsets have waned in the past few years.
"Microsoft has informed Nokia that it will be terminating the manufacturing services defined in the agreement with effect from 1 November 2014. In absence of further orders from Microsoft, Nokia will suspend handset production at the Sriperumbudur facility from 1st November," the company said in a statement.
In September 2013, Nokia announced it would sell its devices and services (D&S) business, including assets in India, to Microsoft for $7.2 billion by March 2014. The deal was completed on April 25 but Chennai facility could not be transferred to Microsoft because of legal issues related to tax demand by Indian government.
In March, the Tamil Nadu government served a Rs 2,400 crore notice on Nokia, saying the firm had also sold products from the Chennai plant in the domestic market instead of shipping them overseas.
In a separate tax case, the Supreme Court had ordered Nokia India on March 14 to give a Rs 3,500 crore guarantee before it transfers the plant to Microsoft. As a consequence, Nokia entered into a transitional services agreement with Microsoft to address their immediate production needs and keep the factory operational.
"Unfortunately, the continuing asset freeze imposed by the tax department prevents Nokia from exploring potential opportunities for the transfer of the factory to a successor to support the long term viability of the established, fully functional electronics manufacturing ecosystem," the statement said.
Nokia said that it will be informing all stakeholders including the Labour Commissioner of the suspension. "As a responsible employer, Nokia is currently evaluating options to minimise the impact on existing employees at the manufacturing facility. It will share further information once details have been finalised," Nokia said.
The exact number of employees at present in its Chennai factory could not be ascertained but in March out of 6,600 permanent employees, about 5000 had opted for Voluntary Retirement Scheme offered by Nokia.