New Delhi: British energy firm Cairn Energy has said it will seek about USD 700 million in compensation from the government for the loss of value of its shareholding in Cairn India suffered since their attachment nearly two years ago over a tax dispute.


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In a letter to Finance Minister Arun Jaitley, Cairn disputed the Rs 10,247 crore tax notice sent to it on alleged capital gains made on a 2006 internal reorganisation of its India business saying no tax was due even if the retrospective amendments to Income Tax Act are applied.


"Even though the transactions undertaken by the Cairn PLC Group companies as part of the Group Reorganisation should not have even been considered as potentially subject to taxation in India, as they occurred outside of India, there would not have been any taxation owed in connection with such transactions even if they had taken place within India as they did not result in any real income earned by the Cairn Energy PLC Group," company chief executive Simon Thomson wrote.


The Income Tax Department says Cairn Energy allegedly made a capital gain of Rs 24,503.50 crore in 2006 while transferring all its India assets to a new company, Cairn India, and getting it listed on the stock exchanges.


Cairn Energy, which had in 2011 sold majority stake in its Indian unit to mining group Vedanta for USD 8.67 billion, still holds 9.8 percent stake in Cairn India. But it has been barred by the I-T Department from selling this stake.


The company has initiated arbitration seeking quashing of the tax notice and compensation for the loss of value of its holding in Cairn India.


"At current oil prices, the billion dollar stake in Cairn India is significantly reduced and compensation at the moment would be around USD 700 million," a company spokesperson said.


Thomson told Jaitley that the application of the retrospective amendments to Section 9 of the Income Tax Act to Cairn constitute a violation of the UK-India Bilateral Investment Treaty.


"...Even if the retrospective amendment did apply to Cairn (which is denied), no amount could be quantified as income that would be liable to tax in India," he wrote.


Cairn said it had in 2006 undertaken a group reorganisation in the manner mandated by applicable Indian laws, regulations and procedures established by authorities such as SEBI, RBI and FIPB.


As part of the exercise, shares of nine subsidiaries were transfered to a newly incorporated company, CUHL in Scotland. These were then transferred to Cairn India Holdings Ltd, a company incorporated in Jersey. In the final step, an Indian company was incorporated, Cairn India Ltd on August 21, 2006.