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Facing a potential tax demand on an alleged Rs 24,500 crore of capital gains it made on transferring India assets to a new company, Scottish explorer Cairn Energy plc today said it was fully compliant with the tax legislation in force when it operated in the country.
The Income-Tax Department had in a January 22 order held that the Edinburgh-based firm made capital gains of Rs 24,503.50 crore when it transferred its entire India business from subsidiaries incorporated in Jersey, a tax haven, to the newly incorporated Cairn India in 2006.
It, according to the I-T Department, received Rs 26,681.87 crore for the asset transfer against its entire investment of Rs 2,178.36 crore (251.22 million pounds) in the India business.
"Cairn has re-confirmed with its advisers that throughout its history of operating in India, the Company has been fully compliant with the tax legislation in force in each year," the company said in a statement.
The firm said the correspondence received from the Income Tax Department indicates that it was in respect of amendments introduced in the Finance Act, 2012 which seeks to tax prior year transactions under retrospective legislation.
"Cairn intends to take whatever steps are necessary to protect the company's interests and defend its position," the UK-based firm said.
While the I-T Department has so far not raised a tax demand on Cairn Energy, it has ordered Cairn India not to allow the transfer of UK firm's residual stake into the company. It also ordered that the shares cannot be pledged or mortgaged.
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.
In 2011, Cairn Energy sold its majority stake in Cairn India to mining group Vedanta for USD 8.67 billion. It still holds a 10.3% stake in Cairn India.
"While this matter is being discussed, Cairn has been restricted by the Income Tax Department from selling its shares in Cairn India (valued at USD 1.0 billion as at December 31, 2013)," the statement of the Scottish firm said. "Cairn will continue to pursue its current exploration and development programme as planned."
Cairn Energy was widely seen as a likely participant in the Indian firm's share buyback, which opened on January 23. Cairn India plans to buy 17.09 crore shares, or 8.9% of the equity, from the open market at not more than Rs 335 apiece, aggregating up to Rs 5,725 crore.
The I-T Department started an investigation on January 15 to establish if capital gains tax was due from Cairn Energy's transfer of shares of Indian assets to Cairn India in 2006.
The scrutiny is on income tax assessments for the year ended March 31, 2007.
