I-T to appeal against Rs 19k-cr relief to Cairn

To consider imposing a penalty in the range of 100-300%

The tax battle between British oil major Cairn and the government is set to get murkier, with the income tax (I-T) department considering appealing in a high court against a tax tribunal’s order giving Rs 18,800-crore interest relief to the company. 

The department is also mulling the imposition of a penalty on Cairn in the range of 100-300 per cent, as the Edinburgh-based company missed the opportunity to get it waived under the dispute resolution scheme that closed on January 31.

The I-T appellate tribunal (ITAT) upheld last week the much-discussed capital gains tax demand of Rs 10,247 crore on Cairn under the controversial retrospective amendment to the law. The tribunal, however, gave relief to the company on the interest amount, on the ground that it was a retrospective levy and could not have been anticipated by the assessee. Besides, the ITAT held that according to section 234B of the I-T Act, a foreign company that pays tax deducted at source is not liable to pay advance tax. The view has been held by the Supreme Court as well. However, the department has filed a review petition in the apex court in a similar case of interest liability.

“We will most likely appeal in the high court in the Cairn case, seeking withdrawal of interest amount relief,” said a government official. The department’s position is that interpretation of the section is not correct, and advance tax must be paid by a non-resident Indian even when tax is deductible on income. A related case is under international arbitration, and the government is hopeful that the ITAT order will bolster its position. Final hearings on the arbitration matter will likely happen in January 2018.

Cairn might also have to face a penalty of up to 300 per cent in the next six months. “We gave the company an opportunity to come under the dispute resolution scheme and get the interest and penalty amount waived. Since it did not (availed itself of this opportunity), we will go ahead with the penalty proceedings,” said another official.

Under the dispute resolution scheme, the government offered a one-time tax settlement scheme to companies from June 1 to December 31, extended until January 31, subject to their agreeing to withdraw any pending case. The government offered to waive the penalty and interest amount for those using the settlement scheme. The interest is much higher than the original tax demand in the case of Cairn. And, if a penalty of over 100 per cent is imposed, it would also be higher than the original tax demand.

The I-T department sent a tax notice to Cairn last year. The amount of interest was given in the notice but not of penalty, said the official. 

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

The I-T department contended Cairn UK made capital gains of Rs 24,503.5 crore. Before the Cairn India IPO, the India operations of Cairn Energy were owned by a company called Cairn India Holdings-Cayman Island and its subsidiaries. Cairn India Holdings was a fully owned subsidiary of Cairn UK Holdings, in turn, a fully owned subsidiary of Cairn Energy. 

At the time of the IPO, ownership of the India assets was transferred from Cairn UK Holdings to a new company, Cairn India. In 2006, Cairn India acquired the entire share capital of Cairn India Holdings from Cairn UK Holdings. In exchange, 69 per cent of the shares in Cairn India were issued to Cairn UK Holdings. Hence, Cairn Energy, through Cairn UK Holdings, held 69 per cent in Cairn India.

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 barred by the I-T department from doing so. The government also froze payment of dividend by Cairn India to Cairn Energy; it recently agreed to lift that freeze.

The case history

• The I-T department, using the retrospective tax legislation, issued a Rs 10,247-crore tax notice to Cairn in January 2014
• In February 2016, the department issued a final assessment order seeking over Rs 29,000 crore in tax from Cairn, including Rs 18,800 crore in interest 
• Interest on the tax was being calculated from 2006 onwards when Cairn India was carved out and listed
• ITAT in March, 2017 upheld I-T department’s order
• But, says no interest for delayed payment