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Cairn Energy of the UK is seeking compensation from India’s government for loss in value due to an “unfair and arbitrary” Rs 10,247-crore tax demand, raised using a retrospective tax law.
Using the UK-India Investment Treaty, the Edinburgh-based firm filed a formal dispute notice against the tax demand raised on an internal business reorganisation seven years ago and sought arbitration with the government to quickly resolve the dispute, impinging on its investment plans.
Cairn said the imposition of capital gains tax on transfer of its India assets in 2006 to a new company, Cairn India, was not only contrary to relevant legal standards but unjust because it was an internal transaction and no shares or assets were sold to any third party for capital gains.
The internal reorganisation was fully disclosed to relevant agencies and ministries including the income tax (I-T) department in 2006-07, the company said adding, it would not have undertaken the reorganisation if it had any indication that its purely internal transaction would be subject to capital gains tax.
Prior to the previous United Progressive Alliance (UPA) government which brought a new law in 2012 to tax share transfer retrospectively, foreign firms which filed returns in their respective jurisdictions were not required to file tax returns in India.
Cairn Energy, being based abroad, did not file returns, too.
The tax demand breaches several of India’s obligations under the treaty, including creating favourable conditions and ensuring fair and equitable treatment and protection and security to Cairn’s investments by introducing unfair and arbitrary tax obligations, it said.
Also, the attachment of Cairn Energy’s 9.8 per cent share holding in Cairn India in the aftermath of the January 22, 2014, tax notice also breached the treaty obligations.
The I-T department says Cairn Energy made a capital gain of Rs 24,503.50 crore in 2006 while transferring all its India assets to Cairn India, and getting it listed on the stock exchanges.
Cairn Energy, which had in 2011 sold a majority stake in its Indian unit to mining group Vedanta for $8.67 billion, still holds 9.8 per cent stake in Cairn India. The I-T department, in January last year, barred it from selling this stake.
Cairn said it was encouraged by the new Bharatiya Janata Party government’s public disapproval, including one by Finance Minister Arun Jaitley, of retro-active taxation.
But it regretted that those sentiments were not reflected in any plan or undertaking to relieve Cairn from the taxation policies of the prior government.
Cairn said given the circumstances, it has no choice but to safeguard and protect its interests and the interests of its shareholders by serving the Notice of Dispute.
Article 9(1) of the UK-India Investment Treaty provides that the parties shall endeavour to settle their disputes through amicable negotiations.
In accordance with this provision, Cairn invited the Government of India to engage in negotiations, which should be commenced immediately.
Cairn said it has been fully compliant with the tax legislation in force in each year and paid all applicable taxes.
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.
