Cairn Energy files arbitration notice in Indian tax dispute

Company says tax department's investigation has meant that Cairn has not been able to proceed with sale of its 10% stake in Cairn India

British petroleum explorer Cairn Energy Plc has instructed its counsel to file a notice of dispute against the income tax department over a tax claim of $1.6 billion (Rs 10,247 crore) for 2006-07.

After the dispute notice is served under the UK-India investment treaty the two sides will enter negotiation seeking resolution.

“To the extent that a satisfactory resolution is not reached during that period, an international arbitration panel will be constituted to adjudicate on the matter,” Cairn Energy said in a statement.

The company also said the tax department’s investigation, which started in 2014, had meant that Cairn was not able to sell its 10 per cent stake in Cairn India valued at $700 million and it would seek “restitution of losses” resulting from the attachment of its stake since 2014.

Cairn Energy has joined a list of multinational companies that are involved in tax disputes with the government, including Vodafone, Royal Dutch Shell, IBM and Microsoft.

The tax demand relates to an alleged Rs 24,500 crore worth of capital gains the company made in 2006 while transferring all of its Indian assets to a new company, Cairn India. The transactions subject to the assessment are those undertaken to effect the group reorganisation to enable the initial public offering (IPO) of Cairn India in 2007.

According to reports, the tax department had stated in an order on January 22 the Edinburgh-based company made capital gains of Rs 24,503.50 crore when it transferred its India business from its subsidiaries to the newly incorporated Cairn India in 2006. Tax authorities are also understood to have stated Cairn Energy received Rs 26,681.87 crore for the asset transfer against its entire investment of Rs 2,178.36 crore in the India business.

After transferring the assets, the company listed Cairn India on the stock exchanges through the IPO that raised Rs 8,616 crore. Cairn Energy had in 2011 sold majority stake in its Indian arm to mining giant Vedanta for $8.67 billion and still holds 10 per cent stake in Cairn India.

Cairn Energy CEO Simon Thomson has said the company has consistently confirmed that it has been fully compliant with all relevant legislation and paid all applicable taxes in India and Cairn Energy is confident of its position under the UK-India investment treaty.

“Against a backdrop of regular engagement with the Government of India since January 2014 it is very disappointing to have received a draft assessment order at this time. Since the election of the BJP, senior Government Ministers have consistently commented on the negative impact the issue of retrospective taxation has had on international reputation and investor sentiment towards India,” he said.

Thomson also said the current issue is confined to Cairn Energy’s interests in India and the group remains well funded to deliver all of its objectives and commitments and looks forward to moving with its strategy while this issue is resolved under legal process.