New Delhi: The Income Tax Department has slapped on UK's Cairn Energy plc a tax demand notice of over Rs 29,000 crore, including Rs 18,800 crore in back dated interest.
Cairn, against whom the I-T Department had on January 22, 2014 issued a draft assessment order of Rs 10,247 crore on alleged capital gains it made in a 2006 reorganisation of its India business, was last month issued a final assessment order.
"The assessment order is in the amount of Rs 10,247 crore (approximately USD 1.6 billion) plus interest back dated to 2007 totalling Rs 18,800 crore (approximately USD 2.8 billion)," Cairn Energy said announcing its earnings for 2015. The tax demand notice came at a time when the government had insisted that it will not raise any fresh tax demand using retrospective tax legislation.
The notice was however issued before Finance Minister Arun Jaitley in his Budget for 2016-17 made a one-time offer to waive interest and penalty if the companies paid the principal amount to settle the retrospective tax disputes. Sources said as per Income Tax rules, an assessment order issued has to be closed within two years and the notice issued now is to close that assessment.
Interestingly, the assessment order back dates interest to 2007, years before the 2012 legislation was enacted to tax such transactions.
"Cairn strongly contests the basis of this attempt to retrospectively tax the group for an internal restructuring," the company said adding it has initiated international arbitration to settle the tax dispute.
The company is claiming full compensation for the USD 1 billion value of which its shareholders have been deprived following the tax notice and freezing of its 9.8 per cent shares in Cairn India.
"The total assets of the Cairn subsidiary against which the tax authorities are seeking to pursue a tax claim are USD 477 million (including principally the group's near 10 per cent shareholding in Cairn India Ltd) and any recovery by the Indian authorities would be limited to such assets," it said.
I-T Department alleges that Cairn Energy made a capital gain of Rs 24,503.50 crore in 2006 when it transferred shares of Indian assets that were held in a subsidiary set up in the tax haven of Jersey, to newly incorporated Cairn India. It listed Cairn India Ltd on the stock exchanges through an initial public offering (IPO) thereafter. Through the IPO it raised Rs 8,616 crore and then in 2011 went on to sell majority stake in Cairn India to mining giant Vedanta Group for USD 8.67 billion.
Cairn Energy still holds 9.8 per cent in Cairn India which the I-T Department has barred it from selling. Also, the department had slapped a demand notice of Rs 20,495 crore comprising tax of Rs 10,248 crore and interest of Rs 10,247 crore, on Cairn India for failing to deduct withholding tax on alleged capital gains made by its erstwhile owner Cairn Energy.
Cairn India is contesting the tax in Delhi High Court. The Income Tax department had on February 4 issued a reminder notice to Vodafone over its Rs 14,200 crore tax dues, a move which the UK firm had termed as showing disconnect with Prime Minister Narendra Modi's promise of a tax-friendly environment, but the government defended it saying the step was a routine exercise.
The department in the notice to Vodafone International Holdings BV sought Rs 14,200 crore in taxes, which it says are due from its USD 11 billion acquisition of Hutchison Whampoa's India telecom business in 2007. The matter is under international arbitration.
"Cairn UK Holdings Ltd, a direct subsidiary of Cairn Energy plc, is in receipt of an assessment order from the Indian Income Tax Department relating to the intra-group restructuring undertaken in 2006 prior to the IPO of Cairn India Ltd in India, which cites a retrospective amendment to Indian tax law introduced in 2012," Cairn Energy said. The company said it has commenced international arbitration proceedings against India under the UK-India Bilateral Investment Treaty.
It is claiming that treaty was breached by India by way of "expropriating Cairn's property without adequate and just compensation, denying fair and equitable treatment to Cairn in respect of its investments and restricting Cairn's right to
freely transfer funds in connection with its investment."
"Based on detailed legal advice, Cairn is confident that it will be successful in such arbitration. Cairn's claim will seek relief by way of indemnification in respect of the tax demand, plus full compensation for its losses (including the loss of the value in the Cairn India Ltd shares)," it added. The company said its tax strategy is fully aligned with its overarching business objectives and principles.
"Cairn commits to managing its tax affairs in a transparent and responsible manner and ensuring that all statutory obligations and disclosure requirements are met. "Cairn's aim is to comply with both the letter and spirit of the law in the relevant jurisdictions in which we operate, to ensure that the right amount of tax is paid, at the right time, within the right jurisdiction," it said.
The company said its "policy is to not enter into any artificial tax avoidance schemes and to build and maintain strong collaborative working relationships with all relevant tax authorities, based on honesty, integrity and proactive cooperation."
The Group aims for certainty in relation to the tax treatment of all items, it added.
Like Cairn, Vodafone had disputed the tax demand over its acquisition of 67 per cent stake in Hutchison, now called Vodafone India, arguing that no tax was due as the transaction was conducted offshore.
But the tax department's contention is capital gains were made on assets in India.
The basic tax demand for Vodafone was Rs 7,990 crore, but the total outstanding, including interest and penalty, is estimated to have risen to Rs 20,000 crore.