“India failed to uphold its obligations”: Cairn Energy.
By Sreekanth A. Nair
British oil exploration company Cairn Energy has approached an international arbitration panel seeking compensation of $5.6 billion from the Indian government for raising a tax demand of Rs. 29,047 crore from the company following its internal reorganization in 2006.
In the statement of claim filed before the panel, Cairn Energy demanded the withdrawal of the tax notice. It argued that India “failed to uphold its obligations” under the UK-India Investment Treaty, reported PTI.
The compensation demand comprises the tax demand raised by Indian Income tax department and the loss of value of 9.8 percent shares of Cairn in its Indian subsidiary along with interest and penalties. The compensation for loss of share value is estimated to be $1.05 billion. The total amount sought is about Rs. 37,400 crore.
If the arbitrator decides not to issue an order against India exercising its tax laws, Cairn has sought compensation for breaching the UK-India investment treaty. Cairn argued that India failed to give fair and equitable treatment to its subsidiary in India under the UK-India Investment Treaty.
In 2006, Cairn Energy transferred all its Indian assets to a new subsidiary called Cairn India and listed the company for expanding its base in India. In 2011, Cairn India sold the majority of its stake to Vedanta Resources keeping only 9.8 percent of shares.
In January 2014, the Income Tax Department slapped Cairn with a tax notice demanding Rs. 1024 crore for the alleged capital gains it made when the shares were transferred to the new company. In the final assessment, the department included another Rs. 18,800 crore as interest.
The Income Tax department was of the opinion that the company made a capital gain of Rs. 24503.50 crore after transferring the shares to the new subsidiary. Cairn said that they would have listed the shares in the UK if they had known that the Indian authorities would charge retrospective tax.
“If Cairn had any idea that India might later change its source rule to impose capital gains tax on routine transfer of shares in non-Indian companies – and retroactively seek to collect an amount of tax that would render the entire IPO transaction value-destructive – cairn would not have undertaken the reorganization or entrusted its listing to the Indian markets. It would instead have created a different transactional structure and pursued an IPO on a UK exchange,” Cairn said in the statement of claims.
The company suffered a loss on its 9.8 percent shares following the proceedings of the department. The Income Tax department barred the company from selling its stake.
The Indian government is expected to file its statement of defense by November before the three-member arbitration panel headed by Geneva-based arbitrator Laurent Levy.