Cairn faces Rs 10,247-crore fine on top of Rs 29,000 crore tax demand

New Delhi: British oil explorer Cairn Energy Plc faces up to Rs 10,247-crore penalty over and above the Rs 29,000 crore in tax and interest demand slapped on it by the I-T Department using a retrospective legislation.

In a circular to shareholders, the company said it had on February 4 received "a final assessment order from the Indian Income Tax Department in amount of Rs 10,247 crore plus interest back dated to 2007 totalling Rs 18,800 crore.

"The aggregate amount of Rs 29,000 crore excludes any applicable penalties which may also be applied to the final assessment (potentially up to 100 percent of the final assessment order, excluding interest)."

The I-T Department had on January 22, 2014 issued a draft assessment order of Rs 10,247 crore on alleged capital gains Cairn made in a 2006 reorganisation of its India business. The final assessment order was issued on February 4, 2016.

The notice was, however, issued before Finance Minister Arun Jaitley in his Budget for 2016-17 made a one-time offer to waive interest and penalty if the companies paid the principal amount to settle the retrospective tax disputes.

"Cairn strongly contests the final assessment proceedings in India and is pursuing its rights under Indian law to appeal the assessment, both in respect of the basis of taxation and the quantum assessed and to protect from enforcement against the assets of CUHL," the company said in the circular.

CUHL is a Cairn subsidiary.

Enforcement of any tax liability deemed due by the Indian Income Tax Department "will be limited to the assets of CUHL which have a current value of approximately USD 477 million, and comprise principally Cairn's residual 10 per cent shareholding in Cairn India, which has already been provisionally attached by the Indian Income Tax Department," it said.

I-T Department alleges that Cairn Energy made a capital gain of Rs 24,503.50 crore in 2006 when it transferred shares of Indian assets that were held in a subsidiary set up in the tax haven of Jersey, to newly incorporated Cairn India.

It listed Cairn India Ltd on the stock exchanges through an initial public offering (IPO) thereafter. Through the IPO, it raised Rs 8,616 crore and then in 2011 went on to sell a majority stake in Cairn India to mining giant Vedanta Group for USD 8.67 billion.

Cairn Energy still holds 9.8 per cent in Cairn India.

The company said it on March 11 this year filed a Notice of Dispute under The UK-India Investment Treaty to protect its legal position and shareholder interests.

"The international arbitration proceedings formally commenced in January 2016 following the agreement between Cairn and the Government of India on the appointment of a panel of three international arbitrators under the terms of the UK-India Investment Treaty," it said. 

Cairn said it strongly contests the basis of the assessment order and the Notice of Dispute is supported by detailed legal advice on the strength of the legal protections available to it under international law.

"While interactions are ongoing with the Indian Income Tax Department, Cairn continues to be restricted from selling its shares in Cairn India and from accessing the related dividends," it said in the circular.

The company said in addition to the resolution of the tax dispute, it is also seeking full recompense for the loss of value resulting from the restriction on its shares in Cairn India.

Cairn Energy has not received any dividend from Cairn India during the previous three years. It said it was entitled to receiving total dividend of about USD 38 million held by Cairn India in escrow for CUHL.

Stating that international arbitration proceedings have commenced with the Government of India to seek resolution of the retrospective tax dispute, Cairn said it would seek USD 1 billion as compensation from Government of India.

"The total assets of the Cairn subsidiary against which the Indian Tax Authorities are seeking to pursue a tax claim are USD 477 million, including primarily the group's near 10 per cent shareholding in Cairn India Ltd and any recovery by the authorities would be limited to these assets," it added.