Cairn Energy wants India to pay $5.6 bn for breach of tax treaty

British oil exploration firm Cairn Energy has sought $5.6 billion in compensation from the Indian government for raising a retrospective tax demand of Rs29,047 crore on what the company stated was an internal reorganisation of its 10-year-old India unit.

The total compensation that Cairn Energy is seeking is equal to the tax demand raised and the value of Cairn Energy's 9.8 per cent shareholding in Cairn India.

The Edinburgh-based company also sought $1.05 billion in compensation for the loss of value of its 9.8 per cent shareholding in its erstwhile subsidiary Cairn India, following the tax demand raised by the Income Tax Department in January 2014 and attachment of its shares.

Cairn Energy, on 28 June, filed a `statement of claim' in an international arbitration panel seeking quashing of the tax demand and declaring that India has "failed to uphold its obligations" under the UK-India Investment Treaty by not giving its investments in the country "fair and equitable treatment."

"In the alternative, and should the (arbitration) Tribunal determine not to order India to refrain from enforcing its unlawful tax demand", it should be compensated for breaches of the Investment Treaty by being paid for the loss of value of its holding in Cairn India as well as interest and penalties, totalling $5.587 billion (Rs37,400 crore), cairn stated in the 160-page 'Statement of Claim'.
 
A three-member arbitration panel headed by Geneva-based arbitrator Laurent Levy began hearing Cairn Energy's plea against tax demand in May and the company filed its 'Statement of Claim' late last month. The Indian government will file its 'Statement of Defence' by November and evidential hearing is expected to commence in early 2017, sources said.

The Income Tax Department had, in January 2014, slapped a tentative assessment Rs10,247 crore in taxes due over alleged capital gain it made while transferring its Indian assets to a new subsidiary, Cairn India, in 2006, and listed the new entity.

Subsequently, the British firm sold majority stake in Cairn India to London-listed Vedanta Resources in 2011 but still holds a 9.8-per cent stake in the company, which was attached by Income Tax Department. This year, the Income Tax Department slapped a final assessment order that included Rs18,800-crore interest on the Rs10,247 crore principal tax amount.

Cairn, in its 'Statement of Claims', said it had an option to list Cairn India on UK stock exchange but decided to go for a local IPO with a view to "further Indianising" the business.

"To accomplish what was to be one of the largest-ever IPOs in the Indian history, however, Cairn had to reorganise its corporate group structure significantly," it said.

But, this, according to the Income tax Department, brought in Rs24,503,50 crore in capital gains for Cairn Energy. This was done in the absence of any plan on the part of the Indian government then to change rules and retrospectively tax, otherwise the company would have restructured business differently and listed the firm on UK exchange, it added.