Cairn Energy to seek damages for retrospective tax demand

Britain-based Cairn Energy on Tuesday said it is contesting a Rs.10,247 crore ($1.6 billion) retrospective demand raised by India's income tax department and it will seek damages for losses resulting from the department's attachment of its stake in Cairn India.

"International arbitration proceedings to resolve the retrospective tax issue in India have now formally commenced following the agreement between Cairn and the government of India on the appointment of a panel of three international arbitrators under the terms of the UK-India Investment Treaty," chief executive Simon Thomson said in a statement here.

Cairn said it had initiated arbitration challenging the levy under the bilateral investment treaty.

"Cairn has a high level of confidence in its case under the UK-India Investment Treaty, and in addition to resolution of the retrospective tax dispute, its statement of claim to the arbitration panel will seek damages equal to the value of Cairn's residual shareholding in Cairn India Ltd at the time it was attached (approximately $1 billion)," the statement said.

While Cairn has earlier named former Bulgarian minister Stanimir Alexandrov as its arbitrator in the tax dispute, the Indian government in November appointed Singapore-based lawyer J.Christopher Thomas as its arbitrator.

Cairn Energy, which in 2011 sold majority stake in Cairn India to mining major Vedanta Resources, has said it had to scale back on investments as it was barred by the income tax department from selling its residual 9.8 percent stake.

The demand relates to alleged Rs.24,500 crore capital gains it made in 2006 when it transferred all its India assets to a new company, Cairn India, which got listed on the stock exchanges.

"Correspondence received from the income tax department indicates that the assessment stems from amendments introduced in the 2012 Finance Act which seek to tax prior year transactions under retrospective legislation," Cairn had said in a statement on receipt of the tax demand in March last year.

In April, Cairn India moved the Delhi High Court seeking quashing of income tax department's demand order to pay Rs.20,495 crore tax - Rs.10,248 crore tax and Rs.10,247 crore interest.

Cairn India, part of the Anil Agarwal-controlled Vedanta group, moved the court against income tax department's order asking it to pay the tax and a direction to tax authorities to take no coercive steps for recovery of demand.

Cairn India said the tax proceedings should be quashed as these were initiated after a lapse of more than six years from the end of 2006-07. The plea said the courts have held that proceedings should be initiated within a reasonable period of four years.

It said that it cannot be penalised because it could not have withheld tax anticipating a retrospective amendment.