Currently, the departments foreign taxation division is vetting the facts of the case to decide whether matter pertaining to assessment year 2007-08 needed to be reopened.
Yet the departments preparations to potentially invoke the contentious Section 9 of the I-T Act against the energy major show that the government wont refrain from initiating fresh cases of retrospective taxation.
As the 2012 Budget provision validating retrospective taxation relating to indirect transfer of Indian assets created a flutter, P Chidambaram, who took over as finance minister later, had to intervene to soothe foreign investor sentiments.
The I-T departments move is despite a clutch of such demands raised by it earlier being subjected to litigation and the fact that several months after a Cabinet
decision that enabled conciliation talks with British telecom major Vodafone in a high-profile case of a similar nature, both sides have yet to establish a framework for the talks.
Analysts say raising tax demand on Cairn, which contribute nearly three-fourths of the governments profit petroleum receipts, could send the wrong signal to investors in the energy sector when India is about to launch the NELP 10th round auctions of oil and gas blocks.
Through the 2006 deal, Cairn Energy had to organise its Indian oil and gas assets under one company incorporated here Cairn India before it could come out with an initial public offering (IPO). The Edinburgh-based firm transferred the share of Indian assets held in a subsidiary in Jersey to Cairn India. The proceeds (which could be deemed either as business income or capital gains by the I-T department) of about Rs 26,000 crore went to the UK firm, which subsequently returned $3.5 billion of cash to shareholders in 2012 following the sale of a 40% stake in Cairn India to Anil Agarwal-promoted Vedanta Resources in 2011.
A Cairn India spokesperson said the company was fully compliant with all Indian income tax laws and the I-T assessments including transfer pricing assessment has been completed for FY07. Cairn is one of the highest contributors to the exchequer by way of taxes and royalties; Cairns gross contribution to the exchequer is in excess of Rs 24,000 crore for the current year. As in the past, Cairn India will be more than happy to provide any documentation or information to the authorities, he said. The spokesperson said I-T officials visited the company for a survey and for requesting information, which was provided to them.
A senior I-T department official told FE: We have just done a survey on (Cairn)... The information and facts of the case have been sent to the international taxation division for vetting. The official said that the department hasnt reached any conclusion as yet but added that initial indications suggests the case might be going in a direction similar to that of the Vodafone case.
Another official said: If after going through all the documents and after giving them (Cairn) an opportunity to show cause on why tax should not be levied on them, we find that there is still a case that can be made out under the provisions of retrospective amendment, then we will proceed against them.
For it to proceed with the case, sources said, the I-T department would need to issue a demand notice to Cairn Energy by March as the relevant transaction was done in 2006-07 (assessment year 2007-08) and, as per law, the tax man should issue the first notice six years from the assessment year. Since Cairn India was not listed at the time of the share transfer, the I-T department could tax Cain Energys gains as business income and tax it at 30%, but tax experts, who did not want to identified, said this was unlikely. In case the (I-T) department finds a case of tax liability, it would likely opt to treat the proceeds as capital gains and not business income and so the tax rate could be lower, said one of them.
Tax experts said that Indian can now get to the UK-incorporated company with a tax demand thanks to the new protocol on exchange of information signed last year under the India-UK double taxation avoidance treaty.
Section 9 deals with taxation of income deemed to accrue or arise in India directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situated in India.
Prior to Cairn Energys asset transfer to Cairn India, its various oil and gas blocks were held as separate joint venture entities for easy management as the rate of success of each asset would vary significantly. At variance with the Vodafone case where both the buyer and seller of the (Indian) assets were foreign firms, in the Cairn case, the assets were transferred to a company incorporated in India.
Some experts said that the tax department can only seek to raise a tax demand invoking the retrospective amendment of the I-T Act of 2012 but not penalty as it is constitutionally prohibited because penal liability cannot be imposed on an act that was not an offence at the time it was committed. Even as there is no official word on waiver of penalty/interest in the Vodafone case, official sources told FE on condition of anonymity that it was unlikely that a notice could be issued on Cairn including penalty/interest.
Since the 2011 buy of Cairn India, Vedanta has raised its stake in the company further to the present 58.76%. Through a share buyback programme set to be completed by July 22, it will up the stake further to 64.53%. Cairn India recently informed the stock exchanges that it received shareholder approval to buy 17.09 crore shares, or 8.9% of the equity, from the open market at not more than Rs 335 apiece. Cairn Energy still holds over 10% in Cairn India and the buyback could include a part of this stake also.
The Shome committee appointed by Chidambaram after Section 9 was amended in Budget 2012 recommended the provision not be used for revenue generation and said that even in the three rare incidents of such taxation (for clarification, correcting mistakes or addressing egregious tax structure), no penalty or interest ought to be levied on the taxpayer. With the Vodafone case, which involves a tax demand of Rs 11,200 crore (along with interest) on its 2007 acquisition of Honk Kong-based Hutchison Whampoas stake in Hutchison Essar, yet to be resolved, the government has remained non-committal on how it viewed the Shome panels recommendations on retrospective taxation.