New Delhi: Final hearing in Cairn Energy Plc.’s challenge to a Rs10,247 crore retrospective tax demand raised by India will begin in August in The Hague, the British firm said on Monday.
The three-member international arbitration tribunal “has stated that it will make appropriate arrangements to progress with the drafting of the award as expeditiously as possible after the final hearing," the company said in its preliminary results announcement.
Cairn had initiated an international arbitration after Indian government in 2014 used a two-year old law to raise a Rs10,247 crore demand on a decade old internal reorganisation of the company’s unit in the country. The 2012 law gave the government powers to impose taxes retrospectively.
“International arbitration proceedings are well advanced with the final hearing of Cairn’s claim under the UK-India Bilateral Investment Treaty scheduled for August 2018 in The Hague," the company said. Following the draft assessment order of January 2014, the tax department attached the company’s residual 9.8% shares in its erstwhile subsidiary, Cairn India, and confiscated $104.7 million dividend it was due to receive.
Also, a Rs1,590 crore income tax refund was also confiscated. Billionaire Anil Agarwal-led Vedanta Group had acquired Cairn India from the British firm in 2011. The company has since merged with Vedanta Ltd, in which Cairn Energy now holds about 5% shares.
“In addition to resolution of the retrospective tax dispute, Cairn’s request for relief to the arbitration panel is seeking damages equal to the value of Group’s residual shareholding in Cairn India Ltd in 2014 plus further assets seized since (approximately USD 1.3 billion)," the statement said.
The company said while it is restricted from selling the shares in Vedanta Ltd, title to the shares remains with the company. Giving a chronology of events, Cairn said its direct subsidiary, Cairn UK Holdings Limited (CUHL) in January 2014 received notification from the Indian income tax department that it was restricted from selling its approximately 10% shareholding in Cairn India Ltd (CIL), which at that time had a market valuation of Rs6,000 crore ($1 billion).
“In that notification, the tax department claimed to have identified unassessed taxable income resulting from certain intra-Group share transfers undertaken in 2006, such transactions having been undertaken in order to facilitate the IPO of CIL in 2007," it said.
Following the merger in April 2017 of CIL and Vedanta Ltd, CUHL’s shareholding in CIL has been replaced by approximately a 5% shareholding in Vedanta Ltd, which are attached by the tax department. At 31 December 2017, the market value of CUHL’s equity and preference shares in Vedanta Ltd was together Rs6,840 crore (approximately $1.1 billion).
“In addition to attaching CUHL’s shares in Vedanta Ltd, the tax department has seized dividends due to CUHL from those shares totalling ₹ 670 crore. It has also notified Cairn that a tax refund of ₹ 1,590 crore due to CUHL as a result of overpayment of capital gains tax on a separate matter in 2011, has been applied as partial payment of the tax assessment of the 2006 transactions," the statement said.
The Rs10,247 crore is the principal tax due plus there would be applicable interest and penalties. “Interest is currently being charged on the principal at a rate of 12 per cent a year from February 2016, although this is subject to the tax department’s Indian court appeal that interest should be back-dated to 2007. Penalties are currently assessed as 100 per cent of the principal tax due, although this is subject to appeal by CUHL that penalties should not be charged given the retrospective nature of the tax levied," the statement added.
Before the arbitration panel, Cairn is pleading that “the assurance of fair and equitable treatment and protection against expropriation afforded by the UK-India Treaty have been breached by the actions of the tax department, which is seeking to apply retrospective taxes to historical transactions already closely scrutinised and approved by the Government of India."
The department has attached and seized assets to try to enforce such taxation. “Cairn’s plea is therefore that the effects of the tax assessment should be nullified and Cairn should receive recompense from India for the loss of value resulting from the 2014 attachment of CUHL’s shares in CIL and the withholding of the tax refund, which together total approximately USD 1.3 billion," it said.