Final hearing in Cairn arbitration against retro tax to begin Monday

The final hearing in British oil firm Cairn Energy plc's challenge to India imposing a Rs 10,247 crore retrospective tax demand will begin in The Hague tomorrow, people familiar with the matter said.

A three-member international arbitration tribunal will begin the 7-10 day long hearing under the cloud of tax department reportedly looking to sell Cairn's remaining shares in Vedanta Ltd to recover the tax demand.

The Income Tax Department had beginning May 14 -- the day Arun Jaitley underwent a kidney transplant surgery and the charge of his finance portfolio was given to Piyush Goyal on a temporary basis -- sold about 6.45 crore shares or around 40 per cent of Cairn's shareholding in Vedanta. As many as 20 million (2 crore) shares were sold between May 14 and May 17 alone.

Sources said India in April submitted its final rejoinder to Cairn's claim for full restitution for losses resulting from the expropriation of its investments in India in 2014 and continued attempts to enforce retrospective tax measures.

This was followed by Cairn submitting its final pleading in May and now the tribunal would begin final oral hearing before sitting down to write the judgment, they said, adding the arbitration award may come as early as 3-4 months.

The tax department had in January 2014 used a two-year-old retrospective tax law to raise a Rs 10,247-crore demand on alleged capital gains made by Cairn Energy on a decade-old internal reorganisation of its India business.

This was followed by attaching the company's residual 9.8 per cent shares in its erstwhile subsidiary, Cairn India. Cairn India was subsequently merged with its new parent Vedanta, in which Cairn Energy held about 4.95 per cent stake.

These shares continued to be attached for four years but the tax department had earlier this year got them transferred to it.

Vedanta in its March quarter filing of shareholding pattern to stock exchanges showed 18.41 crore (4.95 per cent) shares being held by Tax Recovery Officer (International taxation)-I. This in the June quarter filing dropped to 11.96 crore shares (3.22 per cent).

Cairn had in a press statement on July 9 stated that the tax department sold about 40 per cent of its shares in Vedanta for USD 216 million and may sell remaining stake as well. Reports thereafter also stated that tax department would sell the remaining shares as well without waiting for the arbitration award.

E-mails sent to tax department for comments remained unanswered.

Cairn last month stated that the tax department has continued to enforce its retrospective tax claim against the company whilst the arbitration initiated under the UK-India Bilateral Investment Treaty has been ongoing.

"To date, the tax department has seized dividends due to Cairn from its shareholding in Vedanta totalling USD 155 million and it has offset a tax rebate of USD 234 million due to Cairn as a result of overpayment of capital gains tax on a separate matter," it had said.

In all, it has recovered USD 605 million (around Rs 4,000 crore considering foreign exchange rates prevalent at the times of such action).

The Central Board of Direct Taxes (CBDT) had in April, in response to a PTI query, stated that "there is no legal advice against the sale of the attached shares".