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December 23, 2020

Indian Govt asked to pay Rs 8,000 crore to Cairn Energy in Tax Dispute

by CA Shivam Jaiswal in Corporate Law, Income Tax

Indian Govt asked to pay Rs 8,000 crore to Cairn Energy in Tax Dispute

In a major set back, Indian government has lost arbitration to energy giant Cairn under the retrospective tax amendment to the law in a verdict that came late night on Tuesday. India has been asked to pay damages worth Rs 8,000 crore ($1.2 billion) to the UK oil major.

What was the issue with Cairn Energy?

  • Cairn Energy PLC is an independent, UK-based oil and gas exploration, development and production company.
  • Cairn had lost case at Income tax appellate tribunal (ITAT) and the matter was before High Court over the valuation of capital gains and not the constitutionality of the tax demand.
  • The tax demand by India was in respect of Cairn UK transferring shares of Cairn India Holdings to Cairn India, as part of an internal group re-organisation in 2006-07.
  • This gave rise to different interpretations on whether the UK-based company made capital gains, preceding an initial public offering (IPO) of shares by Cairn India.
  • The Income Tax department had contended that Cairn UK made a capital gain of Rs 24,503.5 crore.
  • Before the Cairn India IPO, the India operations of Cairn Energy were owned by a company called Cairn India Holdings-Cayman Island and its subsidiaries.
  • Cairn India Holdings was a fully owned subsidiary of Cairn UK Holdings, in turn a fully owned subsidiary of Cairn Energy.
  • At the time of the IPO, ownership of the India assets was transferred from Cairn UK Holdings to a new company, Cairn India.
  • In 2006, Cairn India acquired the entire share capital of Cairn India Holdings from Cairn UK Holdings.
  • In exchange, 69% of the shares in Cairn India were issued to Cairn UK Holdings. Hence, Cairn Energy, through Cairn UK Holdings, held 69% in Cairn India.
  • Later, in 2011, Cairn Energy sold Cairn India to mining billionaire Anil Agarwal’s Vedanta Group, barring a minor stake of 9.8%.
  • It wanted to sell the residual stake as well but was barred by the I-T department from doing so.
  • The government also froze payment of dividend by Cairn India to Cairn Energy. The government recently agreed to lift that freeze.
  • Cairn Energy filed a dispute under the UK-India Bilateral Investment Treaty, seeking international arbitration that started in 2015 for the value of the confiscated shares and the foregone dividends, plus interest.

What is now payable to Cairn Energy?

  • The Indian government has been asked to pay Cairn Rs 8,000 crore in damages, which include the shares attached by the Income Tax Department in January 2014 and sold in 2018 to partially recover the tax dues.
  • Cairn Energy held 4.95% stake in mining major Vedanta Ltd which the Income Tax Department attached after issuing a tax demand to the British firm in 2014.
  • The government was asked to pay damages at the share value of Rs 330 in 2014 instead of the Rs 220-240 per share price on which it was actually sold by the Income-Tax Department in 2018, in tranches.
  • The damages also include Rs 1,590 crore of tax refund due to the British company besides the legal fees.

Cairn Energy surged as much as 45% in early London trading, its biggest intraday gain in almost 17 years. Cairn Energy’s victory will be the second loss for India in an international arbitration after Vodafone Group Plc won a years-long tax dispute with the government in September over a controversial $3 billion tax demand. Unlike in the Vodafone case, the government will have to repay Cairn.

India in 2012 retrospectively amended the tax code, giving itself the power to go after M&A deals all the way back to 1962 if the underlying asset were in India. It is also likely that the Indian government will review the arbitral award of Cairn Energy in detail before deciding on the next steps and perhaps prefer an appeal

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