Cairn Energy accuses finance ministry official of ordering dividend freeze

Cairn Energy accuses a finance ministry official of ‘privately’ advising Vedanta Group to withhold its dividend income to a potential squaring off a retrospective tax liability


Cairn Energy sold majority stake in Cairn India to Vedanta Group in 2011 but retained 9.8% stake which the tax department had barred it from selling. Photo: Reuters
Cairn Energy sold majority stake in Cairn India to Vedanta Group in 2011 but retained 9.8% stake which the tax department had barred it from selling. Photo: Reuters

New Delhi: British oil firm Cairn Energy Plc has accused a senior finance ministry official of “privately” advising billionaire Anil Agarwal-led Vedanta Group to withhold its dividend income for a potential squaring off of a retrospective tax liability.

Cairn Energy, which is the only company whose assets have been frozen for a retrospective tax demand, has in a written application to an international arbitration tribunal stated that its dividend income from its erstwhile subsidiary Cairn India (now a Vedanta Group firm) has not been paid for last three financial year.

This, it alleged, was done at the behest of an “advise” a senior finance ministry official gave to Vedanta in “private meetings”, multiple people aware of the matter in the tax department and industry said. It has also written to SEBI on the issue.

The income tax department had in January 2014 draft assessment estimated Rs10,247 crore tax due on Cairn Energy for capital gains it allegedly made on a 2006 transfer of India assets to a newly created subsidiary Cairn India and then listing it on stock exchanges.

Cairn Energy sold majority stake in Cairn India to Vedanta Group in 2011 but retained 9.8% stake which the tax department had barred it from selling. After sending draft assessment order, the tax department had in April 2014 also raised a similar tax demand on Cairn India for not withholding tax in 2006.

Both Cairn Energy and Cairn India have initiated separate international arbitrations contesting the tax demands. Though dividend income can be frozen only after a formal tax demand is raised, which happened only on 31 March 2017 after full assessment was completed and 15 June 2017 was given as the due date for payment, Cairn has not received Rs670 crore of dividend income for three fiscals.

When contacted for comments, finance ministry said it does not comment on individual cases. People aware of the matter, however, said the tax department will reply to the arbitration panel saying it does not interfere in matters between two companies.

Cairn India spokesperson said: “The dividends due to Cairn Energy Plc for the last three years are lying in an unpaid dividend account as they were subject to an attachment order under section 281B (of Income tax Act). We would like to reiterate that these dividends are not available for use by Cairn (now Vedanta).”

He further said: “Cairn Energy Plc has also been in touch with us and we have been responding to their mails/letters sharing our predicament in view of the notice now issued to them post the order of the Income Tax Tribunal for payment of tax liability by 15 June 2017.”

When contacted, Cairn Energy plc spokesperson confirmed the company also writing to “SEBI and Cairn India in relation to payment of Cairn India dividends.” “Both SEBI and Cairn India have confirmed receipt of the letter,” the spokesperson said.

Originally, Cairn Energy approached the arbitration panel in February saying India is stopping Cairn India from paying dividend. The tribunal asked the tax department if it had stopped Cairn India from paying dividend. The tax department in its reply stated that the matter was between the two companies and it had no role to play, people said.

When replying to that notice, the tax department had internally observed that there can be no attachment of the dividend unless formal tax demand is raised and tax is not paid. People said based on tax department statement, the Tribunal gave its verdict that it will not intervene. This led to Cairn Energy on 8 March stating in a press statement said the tax department has agreed to lift the freeze it being paid dividend by Cairn India, but it will continue to be restrained from selling the residual stake pending a tax dispute. But the dividends never flowed to the company, prompting it to approach SEBI.

Cairn India replied to that letter saying it had deposited the dividend amount in a scheduled bank within five days of declaring the dividend. However it is awaiting the advise of the revenue authorities whether dividend can be paid. People said Cairn Energy also wrote to the tax authorities on why it was not clearly stating its position on freeze on dividend payments. Now, Cairn Energy has written to arbitrators saying a senior finance ministry official in “private meetings” with Vedanta has advised it against payment of dividend.

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