Arbitration hearings begin in Cairn India's challenge to Rs 20,500 cr tax demand

Hearings have begun on the arbitration challenge mounted by mining billionaire Anil Agarwal-led Cairn India against a Rs 20,500 crore retrospective tax demand and a final order is expected in next few months, sources privy to the development said.

The tax department had in January 2014 slapped a tax demand of Rs 10,247 crore on British oil explorer Cairn Energy plc for alleged capital gains it made on a 2006 internal reorganisation that saw the Indian business being transferred to a new firm, Cairn India Ltd which was subsequently listed.

In March 2015, it also slapped a notice on Cairn India, which was in 2011 acquired by Agarwal's Vedanta Group, for its failure to withhold tax on capital gains made by its erstwhile parent, Cairn Energy.

Cairn India was subsequently merged into Vedanta Ltd. It is now called Vedanta Ltd.

Cairn Energy had challenged the tax demand through an international arbitration and the sources said that the final hearing in that case is scheduled for August.

Separately, Vedanta-controlled Cairn India too challenged the order through a different arbitration notice in March 2015.

It used the UK-India bilateral investment treaty to challenge the tax notice.

The sources said the Indian government challenged the invoking of the arbitration on a tax matter under the bilateral investment treaty.

The three-member International Arbitration Tribunal in an order on December 28 last year held that Vedanta Ltd is an investor eligible for arbitration, they said, adding that hearing on merits of the matter began on April 29 and are likely to be concluded by May 10.

Sources said the Government of India has challenged the December order of the arbitration tribunal in the High Court of Singapore.

In the March 11, 2015 notice, the tax department alleged that Cairn India had failed to withhold tax on the consideration paid to Cairn UK Holdings Ltd (CUHL), a subsidiary of Cairn Energy plc, on transfer of shares to Cairn India as part of group reorganisation during 2006-07 financial year.

It cited the 2012 amendments that gave tax departments powers to retrospectively tax such deals, to demand Rs 20,494.7 crores. This comprised of tax of Rs 10,247.4 crore and interest of an equivalent amount.

The tax department had in the order stated that a short term capital gain of Rs 24,503.50 crores accrued to CUHL on transfer of the shares to Cairn India (now called Vedanta Ltd), on which tax should have been withheld.

Sources said Vedanta believes that there could be no liability on it as it could not have anticipated in 2006-07 that a law would be brought subsequently that would require withholding tax on such transactions.

Vedanta had also challenged the tax demand in the Delhi High Court and the next hearing is scheduled for July 6. It had also filed an appeal before the Commissioner of Income Tax (Appeals).

The Commissioner of Income Tax (Appeals) confirmed the tax demand and interest against Cairn India, which was subsequently challenged before the Income Tax Appellate Tribunal. The next hearing date is not yet fixed.