Cairns legal challenge of the amendment follows the income tax (I-T) department last week attaching Cairn Energy Plcs 10.3% stake in Cairn India the Scottish oil giants only remaining asset in India after selling its Indian business to UKs Vedanta Resources. (Vedanta retained Cairn Indias name post the $8.7-billion deal in 2007.)
The department is planning to sell these shares in the market to recover alleged tax dues arising from Cairns restructuring of Indian assets in 2006-07 after giving another opportunity to the firm to pay up, sources told FE.
Cairn Indias shares attached by the tax authority were worth $1 billion as on December 31, 2013, Cairn Energy had disclosed in an earlier statement responding to the tax demand. Sources said the alleged capital gains tax liability (yet to be calculated) could exceed the value of the attached shares, which was about R6,400 crore as on last Friday.
The department is now reassessing the income of Cairn Energy Plc and its subsidiary Cairn UK Holdings for 2006-07 in order to compute the exact tax liability. It believes Cairn India failed to deduct tax at source on its payment to Cairn UK Holdings.
An email sent to Cairn Energy Plc on Friday was not answered until the time of going to print.
The shares were attached after Cairn UK Holdings recently filed a no income return in India in response to a show-cause notice issued by the I-T authorities relating to Cairns transfer of Indian assets to the then newly-formed Cairn India from certain offshore entities in Jersey in 2006-07. Authorities claim the transaction led to capital gains in the hands of Cairn UK Holdings, that is taxable in India.
Cairns move comes close on the heels of Netherlands-based Vodafone International Holdings BV issuing a fresh notice to India seeking international arbitration to resolve a Rs 20,000-crore tax demand it is facing on its purchase of Hutch-Essar seven years ago. The spate of litigation in various High Courts as well as in the Supreme Court Sanofi Pasteur Holdings 2009 acquisition of Shantha Biotech will be a major legal knot that the new government will have to undo.
The Congress party and BJP manifestos have spoken against retrospective changes to laws that cause hardship to taxpayers.
Sources said the capital gain that Cairn UK Holdings allegedly made of Rs 24,500 crore would get revised in view of the detailed information that the department would be getting from the company. Considering the shares were unlisted, capital gain may be taxed either at 20% or as regular income (at 30%) depending on whether the shares were held by the seller for three years or less. Surcharges are applicable in both cases.
Besides challenging the validity of the retroactive tax, Cairn has also contested the departments charge of failure to withhold tax. The company has also challenged any claim of penalty for delay in payments as the tax liability arose from the amendments introduced six years after the deal, said sources. Assessing officers have the power to waive off penalty, but not interest, which is merely a compensation for financial loss to the government due to the delay in payment.
If the company agrees to pay the dues, the matter will end there. If there still is an unmet tax liability from the deal, the assessing officer can sell the shares and recover dues. We need not have to go to court for this, said a person privy to the development.
Cairn Energy had stated earlier that throughout its history of operating in India, it had been fully compliant with the tax legislation in force in each year. In its earlier petition to the Delhi High Court seeking more time to respond to the tax notice, Cairn India had said the tax claim was highly belated. Cairn India is one of the highest contributors to the exchequer by way of taxes and royalties. Its gross contribution to the exchequer was more than Rs 24,000 crore in 2013-14.
Cairn Energy Plc said on April 3 that Cairn UK Holdings has filed a nil return for 2006-07 as none of its transactions that fiscal year was chargeable to tax in India. Cairn also stated that it intends to take whatever steps are necessary to protect its interests.
Industry would expect that retrospectivity of the 2012 amendments to the IT Act are undone. It is a legislative call the new government has to take. Unless it is done, courts may have to take decisions based on legal interpretation of the amended provisions on which certain cases are pending, said Rahul Garg, leader, direct tax practice, PwC.