Taxman Sells Cairn Energy Shares To Recover Retrospective Dues

Weeks before an international arbitration tribunal rules on retrospective tax levied by India, the Income Tax Department has sold almost all of Cairn Energy Plc’s attached shares to recover a part of the Rs 10,247 crore retrospective tax demand, according to regulatory filing.

While the Indian government had used a 2012 legislation to tax certain past income of at least half a dozen foreign companies such as Vodafone Group, Cairn Energy of the U.K. remains the only company against whom the demand has been enforced and it remains to be seen if an arbitration award against it will be honoured.

Cairn Energy held a 4.95 percent stake in mining major Vedanta Ltd. which the Income Tax Department had attached after issuing a Rs 10,247 crore tax demand in 2014 on alleged capital gains the British firm made on a decade-old re-organisation of its India business.

The Income Tax Department had in May and June sold about 2 percent stake held by Cairn in Vedanta.

Vedanta, in its March quarter filing of shareholding pattern to stock exchanges, showed 18.41 crore (4.95 percent) shares being held by Tax Recovery Officer (International taxation)-I. This in the June quarter filing dropped to 11.96 crore shares (3.22 per cent).

This implies that either all of the shares have been sold or that such shareholding has fallen below 1 per cent.

When contacted for comments, a Cairn Energy spokesperson said, “The international arbitration case under the India-U.K. Bilateral Investment Treaty is in its final stages.”

In March 2015, Cairn filed a notice of dispute under the treaty in order to protect its legal position and seek restitution of the effectively seized by the Income Tax Department in and since January 2014.

"Cairn's principal claims are that the assurance of fair and equitable treatment and protections against expropriation afforded by the treaty have been breached by the actions of the tax department, which is seeking to apply retrospective taxes to historical transactions already closely scrutinised and approved by the Government of India," the spokesperson said.

Cairn said it wants that “the effects of the tax assessment should be nullified and Cairn should receive recompense from India for the loss of resulting from the 2014 attachment of shares and the withholding of unrelated tax refunds, which together total approximately $1.4 billion”.

An international arbitration tribunal has concluded final hearing in the Hague against the imposition of retrospective tax and is expected to give an award in December or January.

Besides selling shares, the tax department has seized dividends due to Cairn from its shareholding in Vedanta totalling $162 million and offset a tax rebate of $234 million due to Cairn as a result of over-payment of capital gains tax on a separate matter.

The Income Tax Department began selling shares on May 14 —the day Finance Minister Arun Jaitley underwent a kidney transplant surgery and the charge of his portfolio was given to Piyush Goyal on a temporary basis. Jaitley resumed charge on Aug. 23.

Sources said that while there was no share sale when Goyal was in charge, it resumed in August-end.

The firm, which gave the country its biggest on-land oil discovery in Rajasthan, is seeking restoration of monetary it enjoyed in 2014 before the government levied retrospective tax demand and attached its shares.

The arbitral tribunal awards are binding and internationally enforceable and there exists no forum for them to be challenged.

The tax department had in January 2014 used a two-year-old retrospective tax law to raise a Rs 10,247-crore demand on alleged capital gains made by Cairn Energy on a decade-old internal reorganisation of its India business.

This was followed by attaching the company’s residual 9.8 percent shares in its erstwhile subsidiary, Cairn India. Cairn India was subsequently merged with its new parent Vedanta, in which Cairn Energy held about 4.95 percent stake.

These shares continued to be attached for four years but the tax department had earlier this year gotten them transferred to it.

The Central Board of Direct Taxes had in April, in response to a PTI query, stated that “there is no legal advice against the sale of the attached shares”.