British explorer Cairn Energy plc today said it has initiated an international arbitration to seek USD 5.6 billion in compensation from the Indian government in case a retrospective tax demand of Rs 29,047 crore is not quashed.
In its half-yearly earnings statement, the company said its subsidiary Cairn UK Holdings Ltd has received an assessment order from the Indian Income Tax Department relating to the intra-group restructuring undertaken in 2006 prior to the IPO of its India unit, which cites a retrospective amendment to Indian tax law introduced in 2012.
"Cairn strongly contests the basis of this attempt to retrospectively tax the group for an internal restructuring," it said in the statement.
The assessment order levies a tax of Rs 10,247 crore plus Rs 18,800 crore of interest back dated to 2007.
"The total assets of CUHL have a current value of USD 475.2 million (about Rs 3,180 crore), comprising principally the group's 9.8 per cent shareholding in Carin India Ltd and any recovery by the Indian authorities would be limited to such assets," the statement said.
Cairn said it is pursuing its rights under Indian law to appeal the assessment, both in respect of the basis of taxation and the quantum assessed.
"CUHL's 9.8 per cent shareholding in Cairn India was originally attached by the Income Tax department in January 2014 and CUHL continues to be restricted from selling such shares," it said.
Cairn said it has commenced international arbitration proceedings under the UK-India Bilateral Investment Treaty on the basis that India's actions have breached the Treaty by expropriating the company's property without adequate and just compensation, denying fair and equitable treatment to it in respect of its investments and restricting its 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," it said.
The seat of arbitration has been agreed as The Hague in the Netherlands and Cairn has filed its Statement of Claim, demonstrating that applying the retrospective amendment and seizing Cairn India shares was in breach of the UK-India Investment Treaty obligations of fair and equitable treatment and its protections against expropriation.
India is expected to file its defence in Q4 2016 with evidential hearings in 2017.
"Cairn has asked the arbitration panel either to order India to withdraw its unlawful tax demand and compensate Cairn for the harm suffered by the seizure of the Cairn India shares, being not less than USD 1 billion (plus costs); or, if the tax demand remains in place, compensate Cairn for the quantum of the tax assessment and the harm suffered by the seizure of the Cairn India shares, being together not less than USD 5.6 billion (plus costs)," the statement said.
The British firm sold majority stake in Cairn India to Vedanta Resources in 2011 but still holds 9.8 per cent stake in the company, which was attached by Income Tax Department.
Like this report? Sign up for our daily newsletter to get our top reports.