Fear of retro returns? Tribunal upholds Rs 10,000-crore tax demand on Cairn

An income-tax (I-T) tribunal has upheld the much-discussed capital gains tax demand of Rs 10,247 crore on British oil major Cairn, under the controversial retrospective amendment to the law.

In an order on Thursday, the I-T Appellate Tribunal (ITAT) here has, however, given relief to the company on interest charges of Rs 18,800 for delayed payment of tax, on the ground that this was a retrospective levy. 

The tax will have to be paid by the company unless it decides to challenge the order in a high court, said experts. Alongside, an international arbitration proceeding between Cairn and the government might continue. 

The ITAT said keeping the issue unnecessarily pending on the plea that a related case was under international arbitration would not be proper, as there was no timeline available about the disposal of the latter case. Also, ITAT observed, its ruling could well be applied to the arbitration proceeding.

A person in the know said final hearings on the arbitration matter would happen in January 2018.

While tax experts say the order will not go down well with foreign investors, the I-T department officials said this will bolster India's position in the international arbitration tribunal.

“(Upholding of) this tax demand is not likely to go down well with foreign investors,” said Rakesh Nangia, managing partner at legal entity Nangia & Co.

The tax liability was under section 9(1) (i) of the I-T Act. This says an indirect transfer of assets situated in India would be liable to be taxed in this country if the value of such assets exceeds Rs 10 crore and represents at least half the total value of assets owned by the company. Naveen Wadhwa of Taxmann says any such business reorganisation that satisfies this section would be liable to be taxed in India. An official spokesperson of Cairn Energy Plc said the company had no comments to offer.

An I-T official said it is clear that layers of companies were created by Cairn only for this transaction.

“It was a very deliberate attempt to evade taxes. It is a big decision for the department. All wings of the department, including assessment, board, dispute resolution and officers, worked closely and in a coordinated manner to present a good case before the ITAT,” he said. 

The demand was in respect of Cairn UK transferring shares of Cairn India Holdings to Cairn India, as part of an internal group reorganisation in 2006-07. This gave rise to different interpretations on whether the UK-based company made capital gains, preceding an initial public offering (IPO) of shares by Cairn India. 

The I-T department contended Cairn UK made a capital gain of Rs 24,503.5 crore. Before the Cairn India IPO, the India operations of Cairn Energy were owned by a company called Cairn India Holdings-Cayman Island and its subsidiaries. Cairn India Holdings was a fully owned subsidiary of Cairn UK Holdings, in turn a fully owned subsidiary of Cairn Energy. 

At the time of the IPO, ownership of the India assets was transferred from Cairn UK Holdings to a new company, Cairn India. In 2006, Cairn India acquired the entire share capital of Cairn India Holdings from Cairn UK Holdings.  In exchange, 69 per cent of the shares in Cairn India were issued to Cairn UK Holdings. Hence, Cairn Energy, through Cairn UK Holdings, held 69 per cent in Cairn India.

Later, in 2011, Cairn Energy sold Cairn India to mining billionaire Anil Agarwal’s Vedanta Group, barring a minor stake of 9.8 per cent. It wanted to sell the residual stake as well but was barred by the I-T department from doing so. The government also froze payment of dividend by Cairn India to Cairn Energy; it recently agreed to lift that freeze.

Slippery slope on taxes

• Evidential hearings expected to take place in January 2018
• Cairn seeks restitution for losses resulting from attachment of its shares in Coal India
• Cairn seeks $5.5-billion damages from India
• Cairn asked the arbitration panel at Geneva to order India to withdraw its tax demand
• Arbitration proceeding commenced in February 2016 after an assessment order in January 2016
• Tax wing in March 2014 froze Cairn’s holding in Cairn India
• In January 2014, Cairn Energy received notice on withholding tax