Another investor-state dispute on horizon for India

Income Tax Dept slaps $1.6 bn tax demand on Cairn Energy; firm to file dispute notice

Source: Financial Express

March 11,2015

Income Tax Department has slapped a Rs 10,247 crore (USD 1.6 billion) tax demand on Cairn Energy Plc, which termed the action as “very disappointing” and said it would contest the order.

The tax demand relates to an alleged Rs 24,500 crore worth capital gains it made in 2006 while transferring all its India assets to a new company, Cairn India, and got it listed on the stock exchanges.

The company said the order came at a time when the BJP government has been publicly talking about the negative impact of retrospective taxation on “international reputation and investor sentiment towards India”.

In a statement, Cairn said it has received “a draft assessment order from the Indian Income Tax Department.”

“The draft order addressed to Cairn’s subsidiary, Cairn UK Holdings Limited, is in respect of fiscal year 2006-07 to the amount of USD 1.6 billion plus any applicable interest and penalties,” it said.

Cairn said it has instructed its counsel to file a Notice of Dispute under the UK-India Investment Treaty in order to protect its legal position and shareholder interests.

Its CEO Simon Thomson said, “Cairn has consistently confirmed that it has been fully compliant with all relevant legislation and paid all applicable taxes in India and we are confident of our position under the UK-India Investment Treaty.

“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. Since the election of the BJP, senior Government Ministers have consistently commented on the negative impact the issue of retrospective taxation has had on international reputation and investor sentiment towards India.”

The Income-Tax Department had in a January 22 order held that the Edinburgh-based firm made capital gains of Rs 24,503.50 crore when it transferred its entire India business from subsidiaries incorporated in places like Jersey, a tax haven, to the newly incorporated Cairn India in 2006.

According to the I-T Department, Cairn received Rs 26,681.87 crore for the asset transfer against its entire investment of Rs 2,178.36 crore in the India business.

After transferring the assets, the Scottish explorer listed Cairn India on the stock exchanges through an initial public offering (IPO) in 2006 that raised Rs 8,616 crore.

Cairn Energy, which had in 2011 sold majority stake in its Indian unit to mining group Vedanta for USD 8.67 billion, still holds 9.8 per cent stake in Cairn India.

“Cairn continues to be restricted by the Indian Income Tax Department from selling its 10 per cent shareholding in CIL, currently valued at approximately USD 700million. Supported by detailed legal advice, on the strength of the legal protections available to it under international law, Cairn does not intend to make any accounting provision in respect of the draft tax assessment. In addition, Cairn will seek restitution of losses resulting from the attachment of its CIL stake since 2014,” it said in the statement.

“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. The transactions subject to the assessment are those undertaken to effect the group reorganisation that was required to enable the Initial Public Offering of Cairn India Limited (CIL) in 2007,” it said.

Cairn said it has been fully compliant with the tax legislation in force in each year and paid all applicable taxes.

“Cairn strongly contests the basis of the draft assessment and the Notice of Dispute is supported by detailed legal advice on the strength of the legal protections available to it under international law,” it said.

Under the terms of the UK-India Investment Treaty, the Government of India and Cairn are now required to enter a period of negotiations to seek a resolution to the dispute. To the extent that a satisfactory resolution is not reached during that period, an international arbitration panel will be constituted to adjudicate on the matter.

Thomson said: “This issue is confined to our interests in India and the Group remains well funded to deliver all of our objectives and commitments and we look forward to moving forward with our strategy whilst this issue is resolved under legal process.”

This entry was posted in Investment treaties, Investor state dispute. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s