Scottish oil explorer Cairn Energy Plc is the latest multi-national firm to get a call over pending tax dues by the Indian authorities, indicating the new government's stance not to pursue such cases to develop a pro-business image is yet to be implemented in full force.
Cairn Energy, which sold its majority stake in Indian arm to Vedanta Resources three years ago, disclosed that 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 $1.6 billion plus any applicable interest and penalties.
It said the firm has instructed counsel to file a notice of dispute under the UK-India Investment Treaty to protect its legal position and shareholder interests.
According to Cairn, the correspondence received from the IT 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 (CIL) in 2007.
It had originally received a communication for the tax authorities in January 2014.
Cairn Energy has claimed that it has been fully compliant with the tax legislation in force in each year and paid all applicable taxes. Further, it added that the company did not intend to make any accounting provision relating to the draft tax assessment it has received.
"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.
If the two parties fail to reach a satisfactory conclusion, an international arbitration panel will be constituted to rule on the matter.
The tax claim made by the Indian tax authorities are related to an alleged Rs 24,500 crore worth capital gains the British oil explorer made in 2006 when it transferred its entire India assets from subsidiaries incorporated in Jersey to the newly incorporated Cairn India in 2006.
Indian tax authorities claimed that Cairn Energy 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 the transfer, it listed Cairn India on the stock exchanges through an IPO in 2006, raising about Rs 8,616 crore.
In 2011, Cairn Energy sealed its deal to divest controlling stake in Cairn India to mining major Vedanta Resources for $8.67 billion. It still owns 9.8 per cent stake in Cairn India which currently valued at about $700 million. Cairn India has been directed by the tax authorities not to allow the transfer of UK firm's residual stake.
Retrospective taxation has received strong criticism from domestic and overseas investors.
In various forums Indian Finance Minister Arun Jaitley had said he does not want to levy any retrospective taxation and had previously come out strongly against the previous government's moves to go after such tax cases which had created uncertainty and negative sentiment about investing in India.
Various MNCs have received such tax notices in the past.
Most recently, the government decided not to appeal against a Bombay High Court order which ruled in favour of telecom giant Vodafone in a tax dispute case. This had signalled the government's stance on the issue. But the latest case with Cairn means the uncertainty for foreign investors continues.
(Edited by Joby Puthuparampil Johnson)
