After Vodafone, Cairn invokes treaty to dodge India’s tax demand

By: |
New Delhi | Updated: March 12, 2015 12:49:28 PM

After Vodafone, British oil major Cairn has now avoided India’s tax jurisdiction, invoking the India-UK bilateral investment protection treaty.

Vodafone, Cairn, Cairn India, tax, income tax, double taxation, retrospective taxationAfter Vodafone, British oil major Cairn has now avoided India’s tax jurisdiction, invoking the India-UK bilateral investment protection treaty. (Reuters)

After Vodafone, British oil major Cairn has now avoided India’s tax jurisdiction, invoking the India-UK bilateral investment protection treaty.

This indicates MNCs find it tough to contest in a local court the I-T department’s ‘retrospective taxation’ powers over long-concluded transactions involving Indian assets.

Cairn Energy late on Tuesday announced its decision file a ‘notice of dispute’ under the treaty, necessitating a period of negotiations, the failure of which could result in international arbitration. The company said the draft income reassessment order issued to subsidiary Cairn UK Holdings for 2006-07 amounts to $1.6 billion (R10,039 crore) plus any applicable interest and penalties.

“The 2012 amendments to the Income Tax Act, 1961, clearly makes indirect transfer of Indian assets including those executed in previous years taxable in India. Since the government has the power to make retrospective changes to the Income Tax Act especially when they are clarificatory in nature, successfully contesting its legal validity in courts may be difficult,” said Amit Maheshwari, partner, Ashok Maheshwary and Associates.

Vodafone, Cairn, Cairn India, tax, income tax, double taxation, retrospective taxation

“Arbitration, on the other hand, offers a better dispute resolution mechanism for a tax dispute rather than getting the law itself struck down,” Maheshwari added.

Bilateral investment protection treaties, including the India-UK one, usually do not fix a time frame for concluding the arbitration.

The department’s dispute with Vodafone over its alleged liability to pay close to Rs 20,000 crore of taxes, interest and penalty on account of its purchase of Hutch Essar in 2007, which triggered the retroactive change in law, is dragging on with the arbitrators appointed by both the parties unable to make up their mind about a third arbitrator.

The tax department wants to levy 20% tax on the alleged short-term capital gain of Rs 24,503 crore that Cairn UK Holdings made in 2006-07 while transferring its Indian assets to Cairn India from Cairn India Holdings incorporated in Jersey. Cairn India acquired the Indian assets of the British energy giant for Rs 26,681 crore. Since the tax liability actually falls on a non-resident company which the department cannot reach out to, it wants to hold Cairn India in default of not having deducted the tax at source while making payment to the UK firm. Since Vedanta has acquired Cairn India from Cairn Energy, the department attached the 10.3% residual stake Cairn Energy holds in the Indian unit towards recovery of alleged dues.

The India-UK treaty prevents each country from expropriating assets of investors from the other except for a public purpose, in which case, the investor is entitled to fair and prompt compensation.

“Cairn continues to be restricted by the Indian income tax department from selling its 10% shareholding in CIL, currently valued at approximately $700million. Supported by detailed legal advice, on the strength of the legal protections available to it under international law,

Cairn does not intend to make any accounting provision in respect of the draft tax assessment,” the company stated. It also said it would seek restitution of losses resulting from the attachment.

While there is no easy solution for the nearly three dozen past disputes arising from the department’s ‘retrospective taxation’ power on indirect sale of Indian assets, the income tax department has not raised any fresh tax claims in the last one year invoking it.

Sources told FE that not a single reference has been made by any field officer yet to a high-level task force set up almost a year ago to examine and vet fresh tax demands under indirect transfer provisions. Sources also said that the leadership has sensitised field officers to be judicious while invoking the retrospective application of the provisions meant to tax global asset transfers involving Indian companies.

Cairn, which approached the Delhi High Court against a show-cause notice served over the 2006-07 reorganisation of Indian assets, subsequently withdrew it in the hope that the notices might be reviewed by a committee set up by finance minister Arun Jaitley aimed at reducing avoidable litigation.

“Cairn went to court and then withdrew the petition. They gave a representation to the high-level committee, which informed the company it would not get the benefit of a review because at the time Budget was presented (announcing the decision to set up the committee for review of such cases), the matter was already under litigation. The finance minister announced the benefit of examination by the committee only for all fresh cases,” explained a person privy to the development.

Do you know What is Repo Linked Lending Rate (RLLR), Wholesale Price Index (WPI), Public Debt, Finance Commission Grants & Other Transfers, Economic Survey? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.