UK major Cairn gets Income Tax demand

New Delhi, March 11 (IANS) Going contrary to Finance Minister Arun Jaitley's promise that India will not levy any tax with retrospective effect, the Income Tax department on Wednesday imposed a Rs.10,247 crore ($1.6 billion) tax demand on British major Cairn Energy.

The tax demand, which the company said it would contest, relates to an alleged Rs.24,500 crore capital gains it made in 2006 when it transferred all its India assets to a new company, Cairn India, which got listed on the stock exchanges.

Cairn, in a statement, said it has received "a draft assessment order from the Indian Income Tax department".

"The draft order addressed to Cairn's subsidiary, Cairn UK Holdings Limited, is in respect of fiscal year 2006-07 to the amount of USD 1.6 billion plus any applicable interest and penalties," it said.

The company has instructed its counsel to file a Notice of Dispute under the UK-India Investment Treaty so as to protect its legal position and shareholder interests.

"Cairn has consistently confirmed that it has been fully compliant with all relevant legislation and paid all applicable taxes in India and we are confident of our position under the UK-India Investment Treaty," Cairn chief executive Simon Thomson said in a statement.

"Against a backdrop of regular engagement with the Government of India since January 2014, it is very disappointing to have received a draft assessment order at this time," he added.

Cairns had declared as much on Tuesday in its statement of earnings for 2014, that it is in talks with the Indian government to resolve a tax dispute that has put on hold the sale of its 10 percent stake in Cairn India Ltd.

"We note the comments made by the new BJP government about the impact of retrospective tax legislation and the negative signal it sends to the international investment community," Cairn chairman Ian Tyler said.

"Our approach to date has been to focus on engagement with the government of India and resolving this matter clearly continues to be a high priority," he added.

"In early 2014, Cairn received notice from the Income Tax department, citing 2012 retrospective legislation and requesting information relating to a group re-organisation in 2006," Cairn chief executive Simon Thomson said.

"At the same time, the Income Tax department restricted Cairn from accessing the value of its remaining 10 percent shareholding in Cairn India Ltd. (CIL), then valued at around $1 billion," he added.

The restraint on selling CIL stake forced Cairn to borrow to finance its North Sea development project and to re-size the company.

Cairn Energy, which had in 2011 sold majority stake in its Indian arm to mining group Vedanta for $8.67 billion, still holds 9.8 percent stake in Cairn India.

"Cairn continues to be restricted by the Indian Income Tax department from selling its 10 percent shareholding in CIL, currently valued at approximately $700 million. In addition, Cairn will seek restitution of losses resulting from the attachment of its CIL stake since 2014," it said in the statement.

"Correspondence received from the Income Tax department indicates that the assessment stems from amendments introduced in the 2012 Finance Act which seek to tax prior year transactions under retrospective legislation," Cairns said on Wednesday.

"Cairn strongly contests the basis of the draft assessment and the Notice of Dispute is supported by detailed legal advice on the strength of the legal protections available to it under international law," the statement added.

Jaitley in the budget for 2015-16 announced that the government would delay by two years the implementation of the planned General Anti-Avoidance Rules (GAAR), which will be applied prospectively from fiscal 2017-18.

The Cairns stock closed on Wednesday at the Bombay Stock Exchange (BSE) down 3.45 percent at Rs.223.70 per share.