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“We're giving the Government of India (GOI) a legal notice,” Vedanta Resources Plc has told the London Stock Exchange.
The Britain-based global metals and mining giant, parent of petroleum explorer Cairn India, has said its counsel was told to file a notice of claim against GOI under the UK-India Bilateral Investment Treaty (BIT), on a Rs 20,494-crore tax demand from the authorities here.
Cairn India told the BSE exchange on Friday of Vedanta’s communication. The company had got an assessment order from the income tax (I-T) department. This is a sequel to the 2012 decision to amend the I-T Act for imposing taxes in this regard with retrospective effect.
Vedanta holds 59.9 per cent stake in Cairn India. The tax demand is for alleged failure to deduct withholding tax on alleged capital gains arising during 2006-07 in the hands of Cairn UK Holdings Ltd (CUHL), erstwhile parent of Cairn India, a subsidiary of Cairn Energy Plc. The demand from Cairn India of Rs 20,494 crore ($3.293 billion) comprises Rs 10,247 crore of tax and an additional identical amount as interest.
“If enforced, such a tax demand would have serious consequences for Cairn India and, therefore, Vedanta's investment in Cairn India. Vedanta understands that a parallel tax demand has also been made by the Indian I-T department on CUHL,” Vedanta said in its communication to LSE.
The notice, served under the BIT, is the first step prior to the commencement of international arbitration under the treaty.
“The BIT provides that the government is obliged, among other things, to accord fair and equitable treatment to investors and to provide full protection and security to investments,” Vedanta said.
Vedanta and Cairn India have been advised by leading international counsel that the retrospective tax legislation is a violation of protections accorded to investors under the BIT and constitutes a serious impairment of the treaty rights of Vedanta, the mining giant said.
The tax demand is in respect of the transaction of CUHL transferring the shares of Cairn India Holdings Ltd (CIHL) to Cairn India as part of an internal group reorganisation in 2006-07, to facilitate the initial public offering (IPO) of Cairn India. The company had on March 13 said it had always been fully compliant with all Indian I-T laws and assessments, including the transfer pricing assessment for 2006-07.
Earlier, Cairn Energy had responded to the tax demand served on it by filing a notice of dispute against the Indian I-T department under the UK-India Investment Treaty.
After the dispute notice, the two sides would enter a period of negotiation, seeking a resolution. Cairn Plc has also reportedly sought compensation from the government for the steep fall in the value of its shares in Cairn India, which it is not allowed to sell until it settles the retrospective tax demand.
