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After Vodafone, Cairn India in I-T dept’s crosshairs

Jan 23 2014, 13:07 IST
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Cairn Energy has transferred shares of the Indian assets that were held in a subsidiary incorporated in Jersey, a tax haven,to newly incorporated Cairn India. Cairn Energy has transferred shares of the Indian assets that were held in a subsidiary incorporated in Jersey, a tax haven,to newly incorporated Cairn India.
SummaryRetrospective amendment used to relook Rs 26,000-cr asset transfer in 2006.

Fiscally stressed and desperate to boost tax proceeds, the government has knocked on Cairn India Ltd's door, evaluating whether a tax demand could be raised on Cairn Energy of the UK for its 2006 transfer of shares of Indian assets to the then newly floated Indian company via tax haven Jersey — the total transaction value was R26,000 crore. Sources say the income tax (I-T) department, which undertook a survey at Cairn India’s Gurgaon office on Wednesday, is still collating data and hasn’t reached a conclusion on whether the tax liability existed.

Currently, the department’s 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 department’s preparations to potentially invoke the contentious Section 9 of the I-T Act against the energy major show that the government won’t 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 department’s 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 government’s 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

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