Cairn India sues govt over Rs 20,494-cr tax demand

Argues tax proceedings initiated after more than six years

Vedanta group company Cairn India on Monday filed a petition in the Delhi High Court here against a Rs 20,494-crore tax demand, seeking quashing of the order.

The company argued the tax proceedings were initiated more than six years from the end of 2006-07 and should be quashed. The Delhi High Court and other courts have held any tax proceeding should be initiated within four years.

The demand is for alleged failure to deduct withholding tax on capital gains arising during 2006-07 in the hands of Cairn UK Holdings, erstwhile parent of Cairn India, a subsidiary of Cairn Energy. The tax department claims capital gains arose from Cairn UK Holdings transferring shares of Cairn India Holdings to Cairn India as part of an internal group reorganisation to facilitate the initial public offering of Cairn India.

The Rs 20,494 crore ($3.293 billion) demand comprises Rs 10,247 crore in tax and an identical amount as interest.

Cairn India maintained it could not be expected to have withheld tax by anticipating a retrospective amendment. “There was no taxable gains and, accordingly, no liability to withhold tax on date of payment. Further, there cannot be any liability to withhold tax on consideration discharged by way of share swap,” said a company executive.

The primary liability to pay tax, if any, was of Cairn UK Holdings and it had initiated arbitration proceedings against the government under the UK-India bilateral investment treaty, he said.  

When contacted, a senior finance ministry official declined to comment on Cairn India’s move, saying that the ministry does not comment on individual cases.

The UK-based global metals and mining group Vedanta had last month said its counsel was told to file a notice of claim against Indian tax authorities. “If enforced, such a tax demand would have serious consequences for Cairn India and, therefore, Vedanta's investment in Cairn India. Vedanta understands that a parallel tax demand has also been made by the Indian income tax department on Cairn UK Holdings,” Vedanta said in its communication to the London Stock Exchange. Vedanta holds a 59.9 per cent stake in Cairn India.

The filing of the case is a first step before commencement of international arbitration.

“The government is obliged, among other things, to accord fair and equitable treatment to investors and to provide full protection and security to investments,” Vedanta said.

Cairn India had been advised by leading international counsel that the retrospective tax legislation was a violation of protection accorded to investors and constituted a serious impairment of the treaty rights of Vedanta, the mining giant said.

Earlier, Cairn Energy had responded to the tax demand by filing a notice of dispute against the Indian income tax department under the UK-India investment treaty. After the dispute notice, the two sides will enter a period of negotiation.

Cairn Energy has also sought compensation from the government for the steep fall in the value of its shares in Cairn India, which it is not allowed to sell until it settles the tax demand.

S P Singh, partner with Deloitte Haskins & Sells said the way India is being singled out on tax matters globally is a worrying issue.

“The government should look at mechanism for limiting controversies at initial stages and every matter should not go to the Cabinet, a high court or the Supreme Court. Revenue authorities world over collect revenues, but why is India being singled out on tax controversies. This is one aspect the government should ponder,” said Singh.

THE TAX TANGLE

• The tax demand is for alleged failure to deduct withholding tax on capital gains arising during 2006-07 in the hands of Cairn UK Holdings, erstwhile parent of Cairn India, a subsidiary of Cairn Energy
• The tax dept claims capital gains arose from Cairn UK Holdings transferring shares of Cairn India Holdings to Cairn India as part of an internal group reorganisation