New Delhi: British oil explorer Cairn Energy Plc. on Tuesday said the final hearing in the arbitration, which it has initiated against a Rs10,247 crore retrospective tax demand raised by India, will begin in August.
In an operational update, Cairn said the three-member international arbitration tribunal has indicated that it will expeditiously draft the award after the hearing. Cairn has taken the arbitration route against the Indian government, which used a new law giving it powers to impose taxes retrospectively for slapping a Rs10,247 crore demand on a decade old internal reorganisation of the company’s unit in the country.
“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," Cairn said. The tribunal was earlier expected to begin final hearing sometime in early 2018 after responses and counter-responses are filed by Cairn and Government of India. But the proceedings were pushed back to August.
“The 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," Cairn said. Cairn’s direct subsidiary, Cairn UK Holdings Ltd (CUHL) had in 2016 received an assessment order from the Indian income tax department (IITD) relating to the intra-group restructuring undertaken in 2006 prior to the IPO of Cairn India Ltd (CIL) in India.
The order cited a retrospective amendment to tax law introduced in 2012. Cairn contested the tax. The assessment order raised tax demand of Rs10,247 crore. An interest of Rs18,800 crore was originally charged from 2007, but this was quashed by the Income Tax Appellate Tribunal in late 2016.
Following that, the IITD issued a revised demand including interest running from February 2016 i.e. 30 days after the date of the assessment order. “Cairn is currently unable to access the value in its about 5 per cent shareholding in Vedanta Ltd, valued at around USD 1.1 billion at December 31, 2017 or accrued dividend payments due of USD 104 million," the company said on Tuesday.
Cairn had sold a majority stake in Cairn India to Vedanta Group in 2011 but continued to hold a minority 9.8% interest. Cairn India has since merged with Vedanta Ltd. Cairn Energy’s holding in Vedanta post merger is little less than 5%. CUHL’s original 9.8% shareholding in Cairn India (now about 5 per cent in Vedanta Ltd) was attached by the income tax department in January 2014 and CUHL continues to be restricted by the IITD from selling such shares, Cairn said.
Additionally, the tax department has seized dividend income due to CUHL from Vedanta Ltd resulting in an exceptional impairment of $104.7 million. A tax refund of Rs1,590 crore has also been directed to the tax department to be set against the 2006-07 liability. Cairn commenced international arbitration proceedings against India under the UK-India bilateral investment treaty in 2015.
It contends that the government’s actions have breached the treaty by expropriating Cairn’s property without adequate and just compensation, denying fair and equitable treatment in respect of its investments and restricting the firm’s right to freely transfer funds in connection with its investment.
Cairn has asked the arbitration panel to order India to withdraw its unlawful tax demand and compensate Cairn for the harm suffered by the seizure of the CIL shares, being not less than $1.1 billion (plus costs). Or if the tax demand remains in place, compensate Cairn for the quantum of the tax assessment and the harm suffered by the seizure of the CIL shares.