Final arbitration hearing of India tax dispute in Aug 2018: Cairn

Cairn initiated arbitration against Indian gov using new law that imposed taxes retrospectively, to slap a tax demand of Rs 10,247 cr on a decade old internal reorganisation of its India unit

British oil explorer Cairn Energy on Wednesday said final hearing in the international arbitration it has initiated against a Rs 10,247 crore retrospective tax demand raised by India, has been pushed back by about six months to August 2018.

Cairn initiated arbitration against the government using a new law that gave it powers to impose taxes retrospectively, to slap a tax demand of Rs 10,247 crore on a decade old internal reorganisation of its India unit.

"The arbitration proceedings are well advanced, and the (arbitration) Tribunal and parties have now agreed the process and timetable for finalising document production, submissions, and hearings.

"This includes some extensions to the previously agreed schedule, and taking into account the Tribunal and parties' availability, the final hearing has now been scheduled for August 2018," it said in a regulatory filing.

The company, however, did not give reasons for the delay.

It had earlier expected responses and counter-responses to be filed with the three-member tribunal by December and final hearing begin sometime early 2018.

"The Tribunal stated that it expects the parties to strictly adhere to the deadlines set out in the amended procedural calendar and it will make appropriate arrangements to progress with the drafting of the award as expeditiously as possible," Cairn said in the filing.

Cairn said its direct subsidiary, Cairn UK Holdings Ltd had in 2016 received an assessment order from the Indian Income Tax Department (IITD) relating to the intra-group restructuring undertaken in 2006 prior to the IPO of Cairn India Ltd (CIL) in India.

The order cited a retrospective amendment to tax law introduced in 2012, it said. "Cairn strongly contests the basis of this attempt to tax the group retrospectively for an internal restructuring."

The assessment order raised tax demand of Rs 10,247 crore. An interest of Rs 18,800 crore was originally charged from 2007, but this was quashed by the Income Tax Appellate Tribunal in late 2016.

Following that, the IITD issued a revised demand including interest running from February 2016 ie 30 days after the date of the assessment order.

"That interest currently amounts to Rs 1,440 crore," it said. "The total assets of CUHL have a current value of $863.1 million (comprising principally the group's shareholding in Vedanta Ltd) and any recovery by the Indian authorities would be limited to such assets."

Cairn had sold a majority stake in Cairn India to Vedanta Group in 2011 but continued to hold a minority 9.8 per cent interest. Cairn India has since merged with Vedanta Ltd.

"CUHL's original 9.8 per cent shareholding in CIL (now about 5 per cent in Vedanta Ltd) was attached by the IITD in January 2014 and CUHL continues to be restricted by the IITD from selling such shares," Cairn said.

Additionally, the IITD has seized dividend income due to CUHL from Vedanta Ltd resulting in an exceptional impairment of $104.7 million.

A tax refund of Rs 1,590 crore has also been directed to the IITD to be set against the 2006-07 liability.

Cairn commenced international arbitration proceedings against India under the UK-India Bilateral Investment Treaty in 2015.

It contends that the government's actions have breached the Treaty by expropriating Cairn's property without adequate and just compensation, denying fair and equitable treatment in respect of its investments and restricting the firm's right to freely transfer funds in connection with its investment.

"Based on detailed legal advice, Cairn is confident that it will be successful in such arbitration," it said.

Cairn has asked the arbitration panel to order India to withdraw its unlawful tax demand and compensate Cairn for the harm suffered by the seizure of the CIL shares, being not less than $1.1 billion (plus costs).

Or if the tax demand remains in place, compensate Cairn for the quantum of the tax assessment and the harm suffered by the seizure of the CIL shares.