Cairn's retro tax case unlikely to be referred to CBDT panel

Company hopes matter will be resolved in an investment-friendly manner

This article has been modified. Please see the clarification at the end.

Cairn India, which has withdrawn its petition challenging the validity of the 2012 retrospective amendment to the Income Tax Act, might not be able to approach the high-level committee of the Central Board of Direct Taxes (CBDT) to be set up for scrutinising all “fresh cases” arising out of change in the law.

“As finance minister Arun Jaitley has stated in his Budget speech, the committee would only look at fresh cases of indirect transfers coming to the notice of assessing officers. We don’t think Cairn’s case can be referred to this panel,” said a senior finance ministry official, who did not wish to be identified. Another official added the terms of reference (ToR) of the committee have not been finalised yet and unless fresh cases are defined in a manner that it includes all cases where assessment has not been finalised, the new panel would not be able to scrutinise the Cairn’s case. ToR might be finalised next month.

The income-tax (I-T) department had issued a show-cause notice to Cairn, but the assessment has not been finalised yet. The company moved the Delhi High Court challenging the Constitutional validity of the amendment. However, after the July 10 Budget announcement, Cairn withdrew the plea on July 23.

“Following the announcements in the Union Budget, the company has withdrawn the Writ. Cairn India reposes its faith in the government and hopes that the matter will be resolved in a manner favourable for the investment climate in the country,” the company said in response to an e-mail query.

Tax experts agreed that going by Jaitley’s speech, Cairn might not be classified as a new case. However, since there is a new government at the Centre, the company is hopeful of a resolution out of court.

“I don’t think it’s a fresh case where you are discovering something new, unless they have some insight, which says if a formal notice is not issued or assessment is not framed it’s a new case,” said Pranay Bhatia, partner, BDO India. He said the company might now reply to the show-cause notice. If the I-T department is not satisfied with Cairn’s reply, it could issue a demand notice. If it issues a demand notice, then Cairn will have the option to challenge the order in the appellate tribunal. Apparently, the company’s withdrawal of the petition also has a clause that it could go back to the court at any stage.

Finance ministry officials denied any discussions with Cairn on the matter at the bureaucratic level. “We have not seen their (Cairn’s) affidavit,” said one official.

Cairn further said it has always been fully compliant with all Indian income tax laws. Income tax assessments, including transfer pricing assessment, have been completed for 2006-07. Cairn India is one of the highest contributors to the exchequer; the company’s gross annual contribution to the government and its nominees is Rs 32,000 crore for FY14, it added.

Cairn Energy had transferred shares of Jersey-based Cairn India Holding to the newly-formed Cairn India in 2006. The total share transfer in India was valued at about Rs 26,000 crore. Tax authorities claimed this led to capital gains for Cairn UK Holdings taxable in India. Although the tax dues have not been estimated yet, the liability at the highest rate of 30 per cent would be about Rs 7,800 crore.

Cairn UK Holdings filed a ‘no income’ return in India in response to a show-cause notice issued by the department. The I-T department restricted Cairn Energy from selling its 10.3 per cent stake in Cairn India, valued at $1 billion as on December 31, 2013, to recover its dues.


CLARIFICATION
An earlier version of this article had mentioned that Cairn Energy had withdrawn the writ petition, which is wrong. The writ was withdrawn by Cairn India. The article has been corrected and we apologise for the mistake.

TAX TANGLE

FM IN BUDGET SPEECH

“All fresh cases arising out of the retrospective amendments of 2012 in respect of indirect transfers and coming to the notice of the Assessing Officers will be scrutinised by a High Level Committee to be constituted by the CBDT before any action is initiated in such cases”

FINMIN OFFICIALS

“Terms of reference of the CBDT committee have not been finalised yet and unless fresh cases are defined in a manner that it includes all cases where assessment has not been finalised, the new panel would not be able to scrutinise the Cairn’s case”

CAIRN SPOKESPERSON

“Following the announcements in the Union Budget, the company has withdrawn the Writ. Cairn India reposes its faith in the government and hopes that the matter will be resolved in a manner favourable for the investment climate in the country”