High Court asks Cairn India for tax demand security

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New Delhi | Published: April 17, 2015 12:47:05 AM

The Delhi High Court on Thursday asked Cairn India to give a proposal by Wednesday as to how it will secure the revenue authorities...

The Delhi High Court on Thursday asked Cairn India to give a proposal by Wednesday as to how it will secure the revenue authorities, which have sought upfront deposit of Rs 3,000 crore in cash and a bank guarantee for a similar amount, till an over Rs 20,000-crore tax dispute is resolved.

A division bench headed by Justice BD Ahmed asked Cairn India to clarify its position regarding how it will pay 50% of the outstanding capital gains tax amount to secure the department and posted the matter for further hearing on April 22.

The government had in January 2014 frozen the 10% shares that UK-based Cairn Energy has in Cairn India, its former subsidiary, and the outstanding dividend to the extent of Rs 4,200 crore of Cairn India, now a part of the Anil Aggarwal-controlled Vedanta group.

The tax demand is in respect of the transaction of Cairn UK Holdings (CUHL) transferring the shares of Cairn India Holdings (CIHL) to Cairn India as part of an internal group reorganisation in 2006-07, to facilitate the initial public offering of Cairn India. The tax demand is for alleged failure to deduct tax on alleged capital gains arising during 2006-07 in the hands of CUHL, the erstwhile parent of Cairn India, a subsidiary of Cairn Energy. The Rs 20,494-crore ($3.293-billion) tax demand from Cairn India comprises Rs 10,247 crore of tax and an additional identical amount as interest.

Cairn India had moved the HC challenging the Income Tax department’s notice asking it to pay Rs 20,495 crore including interest for allegedly failing to pay taxes on gains made by its former parent in a share transfer transaction about eight years ago.

Senior counsel Harish Salve, appearing for Cairn India, argued that the Indian government is trying to invoke the retrospective taxation that was introduced in 2012. Besides, there is no question of capital gains arising out of the transaction as the company had informed the transfer pricing officer about the transaction in 2006, but was served the demand notice only last year, thus there is an “unreasonable delay.”

Salve also contended that “this is a case of oppressive use of force” and the transaction was just a restructuring exercise.

Cairn in its petition has sought quashing of the income tax department’s demand order saying the proceedings were initiated after a lapse of more than six years from the end of the relevant financial year of 2006-07. It said the courts have held that such proceedings should be initiated within a reasonable period of four years.

However, the government refuted the allegations, saying as per their assessment, CUHL has already made capital gains of Rs 24,000 crore. They have been served with a notice and that they have admitted to these capital gains.The court observed that the tax department should apply the correct principle while computing tax and listed the matter for further hearing on April 22.

Attorney General Mukul Rohatgi countered Cairn India’s argument saying this case is different from the Vodafone case as the assets have been transferred from a foreign company to an Indian company. He pointed out the HC was not an appropriate forum to challenge it and if one has to challenge the tax demand it has to be challenged before the dispute resolution panel.

According to Cairn India, it cannot be penalized by expecting that it ought to have withheld tax by anticipating a retrospective amendment. “There was no taxable gains and accordingly, no liability to withhold tax on date of payment. Further, there cannot be any liability to withhold tax on consideration discharged by way of share swap,” it said in its plea. Besides, the primary liability to pay tax, if any, is of CUHL, and it has initiated arbitration proceedings against the government of India under the UK India Bilateral Investment Treaty. Further, the order was a draft, and proceedings had not been concluded, it said, adding it was maintained no interest could be charged, as addition/disallowance that gave rise to the tax demand was solely on the basis of a retrospective amendment to the law.

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