In a setback to mining mogul Anil Agarwal, the government today said he can merge subsidiary Cairn India with his flagship firm Vedanta Ltd only after paying for the shares the Income Tax Department has attached following the Rs 10,247-crore tax dispute.
A top government official said the merger can go ahead if the 9.8 per cent shareholding of Cairn Energy attached by the I-T Department is paid for or an equivalent bank guarantee is furnished or approval is given for issue of fresh shares.
Agarwal's Vedanta Group had in 2011 acquired Cairn India from its British promoters, Cairn Energy Plc, and last year proposed to merge the cash-rich firm with BSE-listed Vedanta Ltd. However, a tax demand on both Cairn Energy Plc and Cairn India under a retrospective legislation is now posing as a hurdle to the merger.
Clarifying on the issue, Revenue Secretary Hasmukh Adhia said, "The only constraint in this case could be that the shares of Cairn Energy in Cairn India cannot be alienated without the permission of the Government of India."
"However, the merger can take place subject to the law of land once this issue of attachment is resolved... Under the Section 281 of the I-T Act, you cannot dispose of shares without permission of the Tax Department."
The I-T Department using the retrospective tax legislation had issued a Rs 10,247-crore tax notice to Cairn Energy in January 2014. In February this year, the department issued a final assessment order seeking over Rs 29,000 crore in tax from Cairn Energy, including Rs 18,800 crore in interest.
To ensure compliance, it had in April 2014 also slapped a tax demand of Rs 20,495 crore on Cairn India, half of it being interest, for failing to deduct withholding tax on alleged capital gains made by its erstwhile parent company, Cairn Energy in 2006-07 when it reorganised India business.
Cairn Energy still holds 9.8 per cent take in Cairn India, but these shares have been frozen by the I-T Department.
The official said the merger of Cairn India with Vedanta can go ahead if the shares attached are paid for.
Cairn Energy's shareholding of 9.82 per cent at today's closing price of Rs 151.55 is worth Rs 2,790.42 crore.
"Cairn Energy can't sell shareholding in Cairn India unless attached assets are released," the official said.
Agarwal's Cairn India moved the Delhi High Court against the tax demand in April last year and the next date of hearing is April 18. Cairn Energy, on the other hand, has initiated an arbitration against the tax demand, saying no tax is due on an internal business reorganisation.
On the government's offer to settle retrospective tax cases if the companies concerned paid the principal tax amount after interest and penalties are waived off, the official said it is up to companies to come forward to settle tax liability.
"The government will notify time limit for settling retrospective cases under the settlement window announced in the Budget," he said, adding that the government continues to follow the judicial process in Cairn as well as Vodafone cases.
The one-time settlement offer "will be a time-bound window. Notification to come after passage of the Finance Bill by mid-May," he said.
The tax demand was in respect of Cairn UK Holdings Ltd, a subsidiary of Cairn Energy Plc, transferring shares of Cairn India Holdings Ltd to Cairn India as part of an internal group reorganization in 2006-07, resulting in Rs 24,503.50 crore of capital gains, preceding an initial public offering (IPO) of shares by Cairn India.
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A Vedanta spokesperson later said: "We have spoken to the Revenue Secretary and he has clarified that the government is not against merger. This is a commercial matter. The government has said it does not want to come in the way of business and there is no such proposal not to allow merger of Cairn India with Vedanta Limited.
"The government is concerned with protecting 9.5 per cent share of Cairn Energy Plc, which is attached currently.
