New Delhi: After Vodafone, Oil explorer Cairn Energy has now avoided India's tax jurisdiction, invoking the India-UK bilateral investment protection treaty.
According to Financial Express, Cairn Energy has filed a formal 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,' 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.
“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.
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.
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.
The Indian income tax department has been restricting Cairn to sell its 10% shareholding in CIL which are currently valued at approximately $700million.
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.
According to the sources, 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.
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.