Cairn struggles on Rs 20,494-cr I-T notice; may impact Vedanta merger

Cairn India had come under the scanner over a transfer-of-assets case 9 years ago

The Centre's resolve to defend its position in the Rs 20,494-crore retrospective taxation case with Cairn India — even as it has stopped pursuing similar cases with other multinational companies such as Vodafone and Shell —highlights the issues facing the petroleum explorer. Analysts say the tax dispute could even impact its proposed merger with Vedanta.

The government lost the transfer pricing cases it was fighting in the Bombay High Court against oil and gas giant Royal Dutch Shell Plc in November 2014 and telecom major Vodafone in January 2015 and subsequently decided against further appeal. “Shell and Vodafone cases went against us, and once we accepted that judgment, we told our officers not to do future assessments and not to further agitate these cases in appeals,” Central Board of Direct Taxes (CBDT) Chairperson Anita Kapur reportedly said on Tuesday.

Things are also looking up in another similar case involving telecom equipment maker Nokia, where the income tax department had frozen its Chennai manufacturing plant for non-payment of dues to the tune of Rs 21,000 crore. The Finland-based company has now indicated it is keen to resolve the tax dispute amicably and that arbitration is not a priority.

For Cairn, however, the picture does not seem to be rosy. The company has already filed a writ petition in the Delhi High Court challenging the I-T department’s Rs 20,000-crore tax claim. Asked about the Cairn India case, CBDT Chairperson Kapur said the government will pursue it. “We have a provisional attachment order. We will ensure our position remains secure,” she said.

Cairn India had come under the department’s scanner over a transfer of assets case nine years ago. Cairn Energy Plc had transferred shares of Cairn India Holdings Ltd to Cairn India in 2006-07 before a proposed initial public offering in India, resulting in alleged capital gain of around Rs 10,000 crore.

 

While the tax department slapped a tax demand of Rs10,247 crore on Cairn Energy and froze its assets in India, a demand of Rs 20,495 crore was raised against Cairn India Ltd. Cairn Energy sold its majority stake in Cairn India in 2011 to Anil Agarwal’s Vedanta Resources for $8.67 billion, leaving it with a minority holding of 9.82 per cent. Vedanta, through a clutch of unlisted and listed subsidiaries, held a 59.9 per cent stake in the explorer at the end of March 2015. Cairn India, in its notice to the stock exchanges in March, opposed the tax demand.

Finance Minister Arun Jaitley had, as part of last year’s Budget announcements, set up a high-level committee for reviewing all retrospective taxation cases. According to Kapur, the committee received less than 10 applications so far. A senior Cairn India executive said the company was informed that its case was not eligible to be taken up by the committee, as the notice for the tax demand was sent a year before the committee's constitution. “I doubt whether the tax case will impact our merger because the entire liability, in case it materialises, will be transferred to the larger entity,” he said. Analysts, however, believe otherwise. “If the government pursues the tax demand, it can extend the closure of the merger,” said Dhananjay Sinha, Head of Research at equity research firm Emkay Global. He also added the company might assume an early resolution of the dispute if it gets a favorable court judgment — like Vodafone and Shell cases —but it was better not to pre-judge the outcome of the judicial process. A finance ministry official, who spoke on the condition of anonymity, said Jaitley had made it clear last financial year that while the government would not pursue fresh cases of pending tax demands on a retrospective basis, the then existing ones, which were in various courts and tribunals, would take their own course. "In the Vodafone and Shell cases, there were rulings against us, and hence we are not pursuing those cases anymore. However, there has been no ruling in the case of Cairn," the official said.