Cairn Energy gets over Rs 29,000-cr tax demand

This includes Rs 18,800 cr in interest; firm says it got the notice before Budget

A few days before Finance Minister Arun Jaitley presented his Budget this year, Edinburgh-based Cairn Energy Plc got a Rs 29,000 crore-plus tax demand that includes Rs 18,800 crore in interest.

Cairn Energy disclosed the figures in its preliminary results declaration on Tuesday. While this has led to a situation where the interest amount is 84 per cent higher than the principal, almost doubling the tax liability, it explains why Jaitley in his Budget speech offered a one-time scheme of Dispute Resolution, wherein a company needs to pay only the tax arrears and the interest liability and penalty are waived.

The Budget announcement was clearly done with a view to pressure companies like Cairn Energy into accepting the scheme, since interest liability had exceeded the principal. UK-based Vodafone is also facing a tax demand of Rs 7,990 crore with the total amount rising to Rs 20,000 crore after interest and penalty.

Finance ministry officials said the demand was not a fresh one, but a routine reminder of outstanding demand. They said Cairn has an opportunity to utilise the one-time settlement. The company, however, is unlikely to take the offer. In its statement, Cairn made it clear that any tax recovery by the government would be limited to about Rs 3,216 crore ($477.5 million) assets of its subsidiary Cairn UK Holdings Ltd (CUHL). Stating that it strongly contests the basis of the attempt to retrospectively tax the group for an internal restructuring, the company said, “The total assets of CUHL have a current value of $477.5 million (comprising principally the group’s 9.8 per cent shareholding in Cairn India) and any recovery by the Indian authorities would be limited to such assets.”

CUHL, a direct subsidiary of Cairn Energy PLC, received the assessment order from the Indian income tax department relating to the intra-group restructuring undertaken in 2006 before the initial public offering of Cairn India. The order sent just days before the Budget cited a retrospective amendment to the tax law introduced in 2012 by the United Progressive Alliance government.

Jaitley had said the resolution scheme was subject to the company concerned agreeing to withdraw any pending case lying in courts or tribunals or any proceeding for arbitration, mediation etc. under Bilateral Trade and Promotion Agreements (BIPA). Cairn has already initiated international arbitration proceedings and has claimed full compensation for the $1 billion erosion in shareholder value, Simon Thomson, chief executive, Cairn Energy PLC, said in his post-result statement. It has alleged that the Indian government expropriated its property "without adequate and just compensation", denied fair and equitable treatment in respect of its investments and restricted Cairn's right to freely transfer funds in connection with its investment.

The company said CUHL was pursuing its rights under Indian law to appeal the assessment, both in respect of the basis of taxation and the quantum assessed. CUHL's shareholding in Cairn India was originally attached by the tax department in January 2014 and CUHL continues to be restricted from selling such shares.

CASE HISTORY

• January 24, 2014
  Cairn Energy receives two notices from I-T dept requesting it to file tax return for year ended March 31, 2007
   
• March 29, 2014
  I-T dept instructs firm to hold shares in Cairn India Limited, valued at $1 billion
   
• March 10, 2015
  

Firm receives draft assessment order from I-T dept for FY07 of $1.6 bn plus interest and penalties
 

March 11, 2015
Cairn files Notice of Dispute under the UK-India Treaty
 

April 2, 2015
Cairn appoints Stanimir Alexandrov as its arbitrator
 

August 12, 2015
Firm files application in International Court of Justice to have an arbitrator appointed on behalf of govt of India
 

November 12, 2015
Central govt appoints Christopher Thomas as arbitrator
 

January 2016
International arbitration commences
 

February 2016
Tax assessment received