Cairn files notice against India in $1.6 billion tax dispute

LONDON/MUMBAI (Reuters) - Oil explorer Cairn Energy Plc has filed a dispute notice against the Indian income tax department over a $1.6 billion tax claim for the fiscal year ended March 2007, in the latest case of a tax row involving a foreign company.

The dispute notice was filed under the terms of a UK-India Investment Treaty, meaning the Indian government and Cairn will start negotiations to find a resolution to the dispute, Cairn said.

If no agreement is reached, an international arbitration panel will rule, it said in a statement on Tuesday.

Cairn shares were seen opening down 25 percent on Wednesday due to the dispute, traders in London said.

Cairn joins a slew of multinational firms, including Vodafone Group Plc, Royal Dutch Shell Plc, IBM Corp and Microsoft Corp, that have fallen foul of India's tax collectors in recent years.

The latest dispute comes as the Indian government, led by Prime Minister Narendra Modi, has sought to reduce tax-related litigation and move towards a tax-friendly regime to boost foreign investors' sentiment.

A few foreign companies including Vodafone and Shell have won favourable rulings in Indian courts on some tax claims, but many cases are still being litigated.

Cairn said the investigation related to transactions carried out to reorganise the company's structure to prepare for Cairn India Limited's stock market flotation in 2007.

In 2011, Vedanta Resources Plc acquired controlling shareholding in Cairn Energy's India unit. The British company's stake in Cairn India was reduced to about 10 percent after the transaction.

The tax department's investigation, which started in January 2014, has meant that Cairn has not been able to proceed with the sale of its 10 percent stake in Cairn India, valued at about $700 million, Cairn said.

Cairn said it would seek "restitution of losses" resulting from the attachment of its stake in Cairn India since 2014. The oil company, however, did not intend to make any accounting provision relating to the draft tax assessment it has received.

"Against a backdrop of regular engagement with the government of India since January 2014 it is very disappointing to have received a draft assessment order at this time," said Cairn Chief Executive Simon Thomson in a statement.

Tax lawyers said the tax office was able to make a demand now on a transaction that happened in the fiscal year 2006/07 due to a 2012 law, which sought to raise tax claims on such past deals.

(Reporting by Karolin Schaps and Sumeet Chatterjee; Editing by Louise Heavens, Robert Birsel)