Cairn moves London tribunal for stay on tax

Govt in its submission has stated tribunal doesn't have jurisdiction over its tax recovery powers

Cairn moves London tribunal for stay on tax Three days ahead of a deadline to pay Rs 10,247 crore in tax, the international tribunal in London will on June 12 hear Cairn’s plea for an interim measure to restrain the government from recovering its dues. 

The government in its submission has stated the tribunal does not have jurisdiction over its tax recovery powers.

The Edinburgh-based oil company has till June 15 to pay tax dues, along with Rs 1,500 crore interest, after which the tax department will begin recovery proceedings.

Seeking an immediate intervention, Cairn argued that the India-UK bilateral investment protection treaty did not permit the government to impose capital gains tax retrospectively. 

The government’s case is investment treaties do not cover tax disputes.

“Tax recovery proceedings are a domestic issue and the tribunal has no role to play in that. With time running out for Cairn, it has sought an urgent intervention from the tribunal. Never before has such an interim order being passed,” a source said. 

The Income Tax Appellate Tribunal had in March upheld the retrospective capital gains tax demand made under a controversial amendment to the law. The income tax department followed this up with a tax notice to Cairn, giving it three months to make the payment.

Cairn approached the international tribunal for an interim measure 70 days after the notice was sent to it.

“They could have filed for the interim measure immediately after receiving the notice on March 14. But they waited 70 days to create a sense of urgency,” the source added.

The tax demand is in respect of Cairn UK transferring shares of Cairn India Holdings to Cairn India as part of a group reorganisation in 2006-07. This gave rise to different interpretations on whether the Cairn UK made capital gains preceding an initial public offering of Cairn India. 

The UK oil major may also to face a penalty of around 300 per cent. In a reminder notice, Cairn was asked why penalty should not be imposed. The tax department has six months since the ITAT order, which is September, to slap a penalty on Cairn. 

The company has not moved a high court in India to challenge the ITAT order. The tax department has filed a caveat with the high court against any demand for a stay by the oil company of the ITAT order. “If they move a high court seeking a stay, the court should not give any decision without asking the department,” an official said.

The tax department will begin recovery proceedings on June 16. Generally, these include attaching assets and bank accounts and writing to debtors asking them to pay the tax department the money they owe the defaulting entity.

Cairn had approached the Securities and Exchange Board of India (Sebi) last month complaining about the non-payment of dividend worth Rs 670 crore due by the Anil Agarwal-led Vedanta group.

If the international tribunal passes a restraining order against the government, domestic law will prevail. The tax department is bound by Section 119 of the Income Tax Act, which says “…no order be issued that require the tax officer to dispose of a particular case in a particular manner….”

“No one has the power to direct us to dispose of a particular case. Only Parliament has that right,” the official said.

Although the ITAT had provided Cairn relief over Rs 18,800 crore interest, the tax department has raised the demand for interest under another section of the income tax law.

“Interest on the outstanding demand has been imposed under Section 220(2) of the Income Tax Act.  If you do not pay the demand, every month there is a one per cent interest. The assessment notice was sent on January 25 last year,” the official said.

Cairn has sought $5.6 billion compensation from the government over the alleged breach of the India-UK investment treaty. 

Under a dispute resolution scheme, the government had last year offered a one-time settlement from June 1 till December 31, which was extended till January 31, to companies that agreed to withdraw pending cases. The scheme waived penalty and interest but Cairn did not use the settlement window. 

In 2006, Cairn India acquired the entire share capital of Cairn India Holdings from Cairn UK Holdings. In exchange, 69 per cent of shares in Cairn India were issued to Cairn UK Holdings. 

Later, in 2011, Cairn Energy sold Cairn India to mining billionaire Anil Agarwal’s Vedanta group, barring a minor stake of 9.8 per cent. It wanted to sell the residual stake as well but was stopped by the tax department from doing so.