BRITISH oil explorer Cairn Energy PLC expects an international arbitral tribunal to give a decree on its challenge to an Indian tax claim of Rs 102.47 billion (about £1.06bn) by summer.
The three-member tribunal, which had, in December 2018, completed hearings in the British company’s challenge, was supposed to give an arbitral award by February last year, but faced unexplained delays.
“All formal hearings and submissions have now been made and the tribunal is in the process of drafting its award,” said the company, in its half-yearly earnings announcement today (10). “The tribunal has indicated that it expects to be in a position to issue the award in the summer of 2020.”
Cairn said it was seeking full restitution for losses totalling more than £1.06bn resulting from expropriation of its investments in India in 2014.
The company, credited with the country’s biggest oil discovery in the state of Rajasthan, received a notice from the Indian income tax department in January 2014, seeking information linked to its reorganisation executed in 2006.
Subsequently, the department attached nearly 10 per cent of Cairn’s shareholding in its erstwhile subsidiary, Cairn India. And, in March 2015, it reportedly sought Rs 102.47 billion in taxes on alleged capital gains made by the company during the internal reorganisation.
Cairn Energy had, in 2010-11, sold Cairn India to the Vedanta group. Following the merger of Cairn India and Vedanta in April 2017, the British firm’s shareholding in its Indian subsidiary was replaced by a shareholding of about 5 per cent in Vedanta, issued together with preference shares.
In addition to attaching its shares in Vedanta, the tax department seized dividends totalling Rs 11.4 billion due to it from those shareholdings, and set off a Rs 15.9-billion tax refund against the demand.
Cairn Energy, in 2015, initiated an international arbitration to challenge the taxation.
The Indian tax department, meanwhile, sold Cairn Energy’s shares in Vedanta as part of dues recovery.
“The Indian income tax department holds Cairn UK Holdings Ltd (a direct subsidiary of Cairn Energy) as an assessee in default in respect of tax demanded on the 2006 transactions, and, as such, has pursued enforcement against CUHL’s assets in India,” said the company’s statement.
“To date, these enforcement actions have included attachment of CUHL’s shareholding in Vedanta Ltd and sale of 181,764,297 shares and seizure of the proceeds, seizure of the proceeds from the redemption of the preference shares, seizure of the $159.8 million dividends due to CUHL, and offset of a $222.8 million tax refund due to CUHL in respect of another matter.”
Nearly 99 per cent of CUHL’s shareholding had been liquidated by the Indian tax department, it said.
The Indian agency’s assessment of principal tax due on the 2006 transactions was Rs 102.67 billion, and applicable interest and penalties.
“Interest is currently being charged on the principal at a rate of 12 per cent per annum from February 2017, although this is potentially subject to the tax department’s Indian court appeal that interest should be back-dated to 2007,” the company noted.
“Penalties are currently assessed as 100 per cent of the principal tax due, although this is subject to appeal by CUHL that penalties should not be charged given the retrospective nature of the tax levied.”
Cairn said it had got legal advice confirming that the maximum amount that could ultimately be recovered from the company by the tax department, in excess of the assets already seized, is limited to the value of CUHL’s assets, principally the remaining ordinary shares in Vedanta Ltd.
Cairn’s statement said: “In March 2015, Cairn filed a notice of dispute under the UK-India Bilateral Investment Treaty in order to protect its legal position and seek restitution of the value effectively seized by the Indian income tax department (IITD) in and since January 2014.
“Cairn’s principal claims are that the assurance of fair and equitable treatment and protection against expropriation afforded by the treaty have been breached by the actions of the IITD, which is seeking to apply retrospective taxes to historical transactions already closely scrutinised and approved by the Government of India.”
Cairn pleaded that the effects of the tax assessment should be nullified and that the company should receive recompense from the government for the loss of value resulting from the 2014 attachment of CUHL’s shares in Cairn India Ltd and the withholding of the tax refund, which together total about $1.4 billion.