Now, Cairn India hit with Rs 10,247-cr tax notice

Just two days after slapping the UK's Cairn Energy Plc with a tax notice of Rs10,247 crore, India's Income Tax Department has sent another notice to its local arm Cairn India demanding Rs20,495 crore in back taxes.

The notice is for Cairn India's failure to deduct withholding tax on alleged capital gains made by its erstwhile promoter, Cairn Energy Plc.

"Cairn India Ltd has received an order from the Income Tax Department today for an alleged failure to deduct withholding tax on alleged capital gains arising during 2006-07 in the hands of Cairn UK Holdings Limited (CUHL), our erstwhile parent company, a subsidiary of Cairn Energy Plc," the company said in a regulatory filing.

This, it said, was in respect of the transaction of CUHL transferring the shares of Cairn India Holdings Ltd (CIHL) to Cairn India Limited as part of internal group reorganisation in 2006-07 to facilitate the IPO of Cairn India Ltd.

"A demand of approx Rs20,495 crore (comprising tax of approx Rs10,248 crore and interest of approx Rs10,247 crore) is alleged to be payable. Cairn India does not agree with this alleged demand and will pursue all possible options to protect its interest," the company said. (See: Cairn files notice over India's Rs10,000 cr tax demand).

Cairn India said it has always been fully compliant with all Indian income tax laws. "Income tax assessments, including transfer pricing assessment were duly completed for FY 2006-07, earlier," it said.

 The company is the latest to join a slew of multinational firms, including Vodafone Group Plc and Royal Dutch Shell Plc, to face tax demand owing to a retrospective tax law.

Earlier this week, Cairn Energy chief executive Simon Thomson had said, "Against a backdrop of regular engagement with the Government of India since January 2014 it is very disappointing to have received a draft assessment order at this time. Since the election of the BJP, senior government ministers have consistently commented on the negative impact the issue of retrospective taxation has had on international reputation and investor sentiment towards India."

The Income-Tax Department had in a 22 January order held that the Edinburgh-based firm made capital gains of Rs24,503.50 crore when it transferred its entire India business from subsidiaries incorporated in places like Jersey, a tax haven, to the newly incorporated Cairn India in 2006.

According to the I-T Department, Cairn received Rs 26,681.87 crore for the asset transfer against its entire investment of Rs 2,178.36 crore in the India business.

After transferring the assets, the Scottish explorer listed Cairn India on the stock exchanges through an initial public offering (IPO) in 2006 that raised Rs 8,616 crore.

Cairn Energy, which had in 2011 sold majority stake in its Indian unit to mining group Vedanta for $8.67 billion, still holds a 9.8-per cent stake in Cairn India.

Under the terms of the UK-India Investment Treaty, the Government of India and Cairn are now required to enter a period of negotiations to seek a resolution to the dispute. To the extent that a satisfactory resolution is not reached during that period, an international arbitration panel will be constituted to adjudicate on the matter.

"Cairn India Ltd has received an order from the Income Tax Department on Friday for an alleged failure to deduct withholding tax on alleged capital gains arising during 2006-07 in the hands of Cairn UK Holdings Limited (CUHL), our erstwhile parent company, a subsidiary of Cairn Energy Plc," the company said in a regulatory filing.

"A demand of approx Rs 20,495 crore (comprising tax of approx Rs 10,248 crore and interest of approx Rs 10,247 crore) is alleged to be payable.

"Cairn India does not agree with this alleged demand and will pursue all possible options to protect its interest," the company said. Cairn India said it has always been fully compliant with all Indian income tax laws.

"Income tax assessments, including transfer pricing assessment were duly completed for FY 2006-07, earlier," it said.

The company is latest to join a slew of multinational firms, including Vodafone Group Plc and Royal Dutch Shell Plc, to face tax demand owing to a retrospective tax law.

Observes note that despite finance minister Arun Jaitley's frequent promises to ease retrospective tax rules introduced by the previous government, reality on the ground has not changed, and 'tax terror' continues to rule.