Arbit approach: Income Tax sells part of Cairn’s stake in Vedanta

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New Delhi | Updated: July 10, 2018 6:04:14 AM

‘Hasty move’ despite ongoing arbitration in The Hague, legal experts term the move impatient

income tax department, Cairn Energy,  Vedanta, The Hague, Vodafone,  Cairn India, IT ActThe department had earlier seized 5 million of Vedanta’s dividend due to Cairn and had chosen not to refund extra capital gains tax of 4 million paid by it. (Reuters)

The income tax department has sold about 40% of Cairn Energy’s residual stake in Vedanta for $216 million, as it persisted with enforcing its $1.6-billion (Rs 10,247 crore) retrospective tax claim on the Edinburgh-headquartered energy major, even as the final arbitration hearing on the matter is slated to start in The Hague on August 20 and the arbitral ruling is expected by the end of the year. Legal experts said though the department’s move might not be technically wrong, it indeed appeared a hasty one. They also wondered whether it had obtained a direction from the arbitral tribunal in such a way that its interests will be safeguarded even in the event of an adverse award.

The department had earlier seized $155 million of Vedanta’s dividend due to Cairn and had chosen not to refund extra capital gains tax of $234 million paid by it. “Following this (stake) sale, Cairn’s retained holding in (Vedanta) is now approximately 3%. It is possible that the (tax department) may make further sales,” the company said in a statement. Cairn’s is the only case of the government realising a part of the monetary value of the disputed retrospective tax claims.

The government hasn’t recovered any amount from telecom giant Vodafone in the other such prominent dispute, which is also under arbitration. Neither has the government seized/realised any amount in a clutch of arbitration cases overseas where Reliance Industries is the other party.

Cairn Energy, through its direct subsidiary Cairn UK Holdings, had a 9.8% stake in Cairn India (now Vedanta) till early 2017. In January, 2014, the I-T department restricted sale of the stake after issuing the retrospective tax demand (in relation to Cairn’s intra-group share transfers undertaken in 2006 in the run-up to Cairn India’s initial public offering in 2007) and the shares were soon attached. Cairn Energy’s stake in Cairn India came down to 4.95% after Vedanta acquired the latter (the transaction was completed in April 2017). The department earlier this year got the shares transferred to itself.

The stake was sold by the I-T department for around Rs 230 a piece. The Vedanta stock closed at Rs 226.4 on the BSE on Monday. “The tax department does not elevate or glorify itself, first by making high-pitched assessments and then using coercive powers to attach. Both these, arising in a retrospective tax legislation context, are bad enough. In the present case, there is a triple whammy inasmuch as the recovery is also sought to be made by selling the shares, and, finally, a quadruple one, by doing all this while the actual dispute under arbitration is pending for years. Worst example of adding insult to injury,” SC senior lawyer Abhishek Manu Singhvi said.

Former additional solicitor general and senior Supreme Court lawyer Prag Tripathi said that “technically the revenue (department) may not be wrong, but if properly constituted international arbitration proceedings are about to reach a conclusion, strategic wisdom and keeping in mind larger consideration of India as an attractive FDI (foreign direct investment) destination would both point towards patience and awaiting the final award”.

Former solicitor general Mohan Parasaran concurred: “The tax department is acting hastily. If it loses the arbitration who is the loser? We the taxpayers for its over-zeal.” Parasaran also wondered if the department has a positive legal advice to sell the shares. Cairn said it is seeking “full restitution for losses totalling approximately USD 1.3 billion resulting from India’s expropriation of its investments in India in 2014, and India’s unfair and inequitable treatment of those investments, due to the imposition of retrospective tax measures”. The reparation sought by Cairn in the arbitration is the monetary value required to restore Cairn to the position it would have enjoyed in 2014 but for the “government of India’s actions in breach of the (India-UK bilateral Investment) treaty”, Cairn added.

“Accordingly, the status of Cairn’s assets seized in India does not affect the merits of Cairn’s claims, the amount of relief sought, or the enforceability of the arbitral award,” it said. Cairn also said it will write down the carrying value of its investment in Vedanta following the share sale. While India’s retrospective taxation in relation to cross-border transactions dates back to the UPA-2 government period when Pranab Mukherjee was the finance minister (who brought about the 2012 amendment to I-T Act, after the Supreme Court struck down an earlier move), the Narendra Modi government has chosen not to delete the changes and let the cases take their course in courts.

Though the government has indicated that it would not file appeals in higher courts if a verdict went against it in the retrospective tax cases, it hasn’t really walked the talk and has been rather slow in cooperating with the companies when it came to settling the issues via arbitration. For instance, in the Cairn case, New Delhi initially said the tax matters cannot be arbitrated outside India under the India-UK treaty.

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