India's income tax department has slapped a Rs 102.47 billion ($1.6 billion) tax demand on Cairn Energy, which termed the action as “very disappointing” and said it would contest the order. The tax demand relates to an alleged Rs 245 billion worth capital gains it made in 2006 while transferring all its India assets to a new company, Cairn India, and got it listed on the stock exchanges.
The company said the order came at a time when the BJP government has been publicly talking about the negative impact of retrospective taxation on “international reputation and investor sentiment towards India.”.
Its CEO Simon Thomson said, “Cairn has consistently confirmed that it has been fully compliant with all relevant legislation and paid all applicable taxes in India and we are confident of our position under the UK-India Investment Treaty... Against a backdrop of regular engagement with the Government of India since January 2014 it is very disappointing to have received a draft assessment order at this time.”
The I-T department had in a January 22 order held that the Edinburgh-based firm made capital gains of Rs 245 billion when it transferred its entire India business from subsidiaries incorporated in places like Jersey, a tax haven, to the newly incorporated Cairn India in 2006.
According to the I-T department, Cairn received Rs 266.82billion for the asset transfer against its entire investment of Rs 21.78 billion in the India business. 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 86.16 billion. Cairn Energy, which had in 2011 sold majority stake in its Indian unit to mining group Vedanta for $ 8.67 billion, still holds 9.8% stake in Cairn India. “Cairn continues to be restricted by the Indian income tax department from selling its 10% shareholding in CIL, currently valued at approximately $700 million. Supported by detailed legal advice, on the strength of the legal protections available to it under international law, Cairn does not intend to make any accounting provision in respect of the draft tax assessment. In addition, Cairn will seek restitution of losses resulting from the attachment of its CIL stake since 2014,” the company said in a statement.