I-T Dept slaps Rs 20,495 cr tax demand on Cairn India

Demand pertains to Cairn UK Holdings transferring shares of Cairn India

Cairn India Ltd, the petroleum arm of London-headquartered Vedanta Resources Plc, said on Friday, it received a tax notice of Rs 20,495 crore from the Income Tax Department for failing to deduct withholding tax on alleged capital gains by its erstwhile promoter, Cairn UK Holdings Ltd (CUHL), a subsidiary of Edinburgh-based Cairn Energy Plc.

The tax demand pertains to Cairn UK Holdings Ltd transferring the shares of Cairn India Holdings Ltd (CIHL) to Cairn India, as part of an internal group reorganisation in 2006-07, to facilitate the initial public offering of Cairn India. “A demand of Rs 20,495 crore (comprising tax of Rs 10,248 crore and interest of Rs 10,247 crore) is alleged to be payable,” Cairn India said in a filing to the BSE, adding the company didn’t agree with this demand and would pursue “all possible options” to protect its interests.

It said it had always been fully compliant with all Indian income tax laws, adding assessments, including those for transfer pricing, were duly completed for 2006-07. It said from media reports, it had understood the department had also made a tax demand on CUHL.

On Tuesday, UK-based Cairn Energy had said it had received a draft assessment order from the tax department, claiming $1.6 billion (Rs 10,247 crore); this pertained to an alleged Rs 24,500-crore worth of capital gains the company had made in 2006 while transferring all its India assets to a new company, Cairn India, and getting it listed on exchanges.

Cairn Energy responded to the demand by filing a dispute notice against the Indian income tax department, under the UK-India investment treaty. Following this notice, the two sides will negotiate and seek a resolution within a particular period.

The government, which has 90 days to respond to the notice, is reportedly working on a strong rejoinder that will highlight the fact that the treaty does not cover taxation disputes.

On Thursday, British foreign minister Philip Hammond raised the issue with Finance Minister Arun Jaitley and expressed concern over the tax demand.

Diplomatic sources said on Friday, the UK strongly raised the Cairn Energy taxation issue and urged Jaitley to implement the measures announced in the Budget. Apparently, Chancellor of Exchequer, George Osborne, and Jaitley discussed matters related to the implementation of the General Anti Avoidance Rule after 2017 and its impact on UK firms operating in India.

In his Budget speech last year, Jaitley had announced a committee would be set up to review cases of retrospective taxation to reduce avoidable litigation.

Last year, Cairn India had approached the Delhi High Court against a show-cause notice served to it over the reorganisation of Indian assets in 2006-07; subsequently, however, it had withdrawn the appeal.

With Friday's tax demand, Cairn has become the latest company to join a slew of multinational firms, including Vodafone Group Plc and Royal Dutch Shell Plc, facing tax demands, owing to a retrospective tax law — a 2012 amendment in the Indian Income Tax Act, 1965, which allows taxation of indirect transfer of shares in the past.

HOW THE STORY UNFOLDED

2006: Cairn Energy creates a new company, Cairn India, and transfers its India assets to it

2007: Cairn India listed on stock exchanges, after an IPO

2011:Cairn Energy sells majority stake in its Indian arm to mining giant Vedanta for $8.67 billion

2012: UPA government amends the I-T Act of 1961 to allow retrospective taxation of indirect share transfer

Jan 2014: Tax department contacts Cairn Energy to audit its finances and weigh tax assessments for 2006-07

June 2014: New government assumes office; FM sets up panel to review retrospective claims, saying no new liabilities will be created under the 2012 law

2015 
I-T department slaps $1.6-billion (Rs 10,247 crore) claim on Cairn Energy, saying the firm allegedly made capital gains of Rs 24,503.50 crore when it transferred its India business to Cairn India; company files dispute notice

March 13, 2015: I-T department slaps Rs 20,495-crore tax demand on Cairn India for failing to deduct withholding tax on alleged capital gains made by its erstwhile promoter, Cairn UK Holdings