Cairn Energy seeks compensation from India on tax demand

Cairn Energy of UK is seeking compensation from the Government of India for the loss in value it suffered due to an "unfair and arbitrary" Rs 10,247 crore (Rs 102.47 billion) tax demand raised using a retrospective tax law.

Using the UK-India Investment Treaty, the Edinburgh-based firm filed a formal dispute notice against the tax demand raised on an internal business reorganisation seven years ago and sought an arbitration with the government to quickly resolve the dispute that is impinging on its investment plans.

Cairn said the imposition of capital gains tax on transfer of its India assets to a new company, Cairn India in 2006, was not only contrary to relevant legal standards but unjust because it was an internal transaction and no shares or assets were sold to any third party to make any capital gains.

The internal reorganisation was fully disclosed to relevant agencies and ministries including Income Tax Department in 2006-07, the company said adding it would not have undertaken the internal reorganisation if it had received any indication that its purely internal transaction would be subject to capital gains tax.

Prior to the previous UPA government bringing a new law in 2012 to tax share transfer retrospectively, foreign firms - filing returns in their respective jurisdictions - were not required to file tax returns in India.

Cairn Energy, being based outside India, too did not file returns.

The tax demand breaches several of India's obligations under the UK-India Investment Treaty including that of creating favourable conditions and ensuring fair and equitable treatment and full protection and security of Cairn's investments by introducing unfair and arbitrary tax obligations, it said.

Also, the attachment of Cairn Energy's 9.8 per cent share holding in Cairn India in the aftermath of the January 22, 2014 tax notice also breached the treaty obligations. Income Tax Department says Cairn Energy allegedly made a capital gain of Rs 24,503.50 crore (Rs 245.03 billion) in 2006 while transferring all its India assets to a new company, Cairn India, and getting it listed on the stock exchanges.

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

The I-T Department, in January last year, barred it from selling this stake.

In the Notice of Dispute filed under UK-India Investment Treaty, Cairn sought withdrawal of all notices, release of attached shares and payment of full compensation for any resulting damages sustained by it, including for the diminution in value of the attached shares (which have declined in value by hundreds of millions of US dollars since they were first attached).