Vodafone verdict: Impact on Cairn unlikely, basis of scrutiny distinct

Cairn is awaiting its own arbitration award for which the final hearings concluded way back in 2018

Cairn Plc that has been in a protracted dispute over retrospective tax with the central government is cautious after last week’s Vodafone arbitration award. The Vodafone award could have had a bearing on its case, if hearings had not concluded. 

The UK-based company is awaiting its own arbitration award for which the final hearings concluded way back in 2018. 

Tax experts, however, claimed that the income tax department treated the Vodafone and Cairn cases separately since the latter’s tax scrutiny was due to internal ownership reorganisation, unlike the British telecom major’s case. 

Another person in the know said the government may not easily give in as far as Cairn Plc is concerned. This is because the capital gains demand came due to internal transfer of equity of nine subsidiaries to the Indian arm before it was listed. A Cairn spokesperson, however, remained tightlipped on the impact the Vodafone ruling would have on its case. 

The Delhi income tax wing, which had frozen Cairn Plc’s holding in Vedanta that is now heading for delisting from the BSE, has sold off 181,764,297 shares and also clawed dividend income. 

The UK company originally held around 5 per cent in Vedanta which was reduced to 0.1 per cent through the share sale as of March 2020. 

“Cairn has legal advice confirming that the maximum amount that could ultimately be recovered by the income tax department is limited to the value of Cairn UK Holdings (CUHL) assets. That is, principally, the ordinary and preference shares in Vedanta, almost all of which have already been sold and/or redeemed. They also include, the seized dividends and tax refunds from 2009 and 2011,” Cairn Plc had said in March. 

About $1 billion of assets were collected through dividends, tax refunds and share sales.

Cairn Plc’s holding in Vedanta emerged from the merger of Cairn India with the Anil Agarwal-promoted company. Cairn Plc had earlier (in 2011) sold its India subsidiary Cairn India to Vedanta. 

The British company had started production of crude oil from the prolific Barmer field in Rajasthan in partnership with government-owned Oil and Natural Gas Corporation (ONGC) and had also listed its India business separately in 2007.

“Drafting of the final award with respect to Cairn’s claim under the treaty is ongoing. The arbitral tribunal expects to be able to issue an award after the end of summer 2020,” the spokesperson said in response to Business Standard queries. He, however, did not give any expected date. 

In a regulatory filing earlier, the UK company said it was confident that the group would be successful in the arbitration. Therefore, no provision was made in the 2019 financial statements of any amount demanded by the income tax department. 

In January 2014, CUHL received notification from the income tax department that it was restricted from selling its shareholding in Cairn India. At that time, the shareholding was approximately 10 per cent and had a market valuation of about Rs 6,000 crore.  

In that notification, the department said it had identified unassessed taxable income resulting from certain intra-group share transfers undertaken in 2006 to facilitate the IPO of Cairn India in 2007.