Cairn Energy Liable To Pay Rs 10,000 Crore Capital Gains Tax Over 2006 Transfer Of Shares

The Income Tax Appellate Tribunal (ITAT) has upheld the levy of Rs 10,247 crore capital gains tax on U.K.'s Cairn Energy Plc. but has held that interest cannot be charged on it as the demand was raised using retrospective tax legislation.

ITAT, in an order dated March 9, 2017, held that Cairn Energy was liable to pay the tax on share transfer it did through an internal reorganisation of its India business in 2006, prior to getting Cairn India listed on stock exchanges. The tribunal also said that Cairn India should have withheld tax on capital gains made by its parent company. It was parallely sent a demand notice by the Income Tax (IT) department for not doing so.

Cairn Energy had approached ITAT after it was slapped with an tax assessment order of Rs 10,247 crore in January 2014. Later, it also initiated international arbitration against the tax demand, which is still pending.

The IT department had raised a total tax demand of Rs 29,047 crore on Cairn Energy, including Rs 18,800 crore in backdated interest. A similar tax demand was also raised on Cairn India, the Indian subsidiary of Cairn Energy which the British firm sold to Anil Agarwal's Vedanta Group in 2011. In its plea before the ITAT, Cairn Energy had said that the assessing officer had "erred" in raising tax demand by invoking the retrospective amendment to Section 9 of the Act introduced in the Finance Act, 2012, which was not on the statute when the India-United Kingdom Tax Treaty entered into force.

"It is therefore submitted that the taxability of the Appellant should have been determined under the provisions of section 9(l)(i) the Act which were applicable when the India - United Kingdom Tax Treaty was entered into force," Cairn Energy said.

The ITAT said the provisions of DTAA where it simply provides that particular income would be chargeable to tax in accordance with the provisions of domestic laws, such article in DTAA also cannot the limit the boundaries of domestic tax laws.

"In view of this, we do not find any force in the argument of the assessee and dismiss ... the appeal," ITAT said.

With regard to interest payment, it opined that assessee cannot be burdened with interest u/s 234A and 234B of the Act on tax liability arising out of retrospective amendment w.e.f. April 1, 1962, in the provision of section 9(1) of the Income Tax Act.

"We have carefully considered the rival contentions. In the present case the interest has been charged on the tax payable by the assessee which has arisen because of retrospective amendment made by The Finance Act, 2012.

"Therefore, it is correct on the part of the assessee to submit that it could not have visualise its liability for payment of advance in the year of transaction therefore, there cannot be any interest payable by the assessee u/s 234A and 234B of the Act," the ITAT ruled. ITAT also rejected Cairn's contention that they have not earned any real income and there has been no increase in the wealth of the assessee.

It observed that there was an increase in the wealth of Cairn owing to the IPO and value derived by book building process.

Nangia & Co said the revenue authorities stuck to their contention that tax disputes are outside the purview of BIPA.

"ITAT observed that keeping the issue unnecessarily pending won't be proper since there is no timeline available about the disposal of the application of the assessee for arbitration proceedings and also that ITAT's ruling once passed can very well be applied to the arbitration proceedings," said Rakesh Nangia, Managing Partner, Nangia & Co.