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Cairn Hopeful Of Indian Tax Case Win In August

by Mary Swire,, Hong Kong

16 March 2018

In its preliminary first quarter results for this year, published on March 13, 2018, Cairn Energy provided an update on the ongoing tax dispute with authorities in India, being heard in international arbitration under the UK-India Bilateral Investment Treaty.

The group confirmed that a final hearing is set for August 2018. Earlier, the group had hoped the case would be concluded by January 2018.

The dispute concerns an intra-group restructuring that Cairn undertook in 2006, to facilitate the Initial Public Offering (IPO) of its subsidiary in India, Cairn India Limited (CIL).

In 2012, India retrospectively amended Indian tax law. The amendment was given retroactive effect from 1961, the year in which India's current income tax legislation was introduced. It was introduced after a ruling from the Supreme Court in the Vodafone International Holdings BV case, in which the court said that transfers of non-resident companies made by non-residents should not attract Indian capital gains tax. Indian lawmakers defied the ruling by amending Section 9 of the Income Tax Act 1961 with retroactive effect.

Although the circumstances for Cairn's affected transactions are different to Vodafone's, India likewise used the retrospective amendment to assess tax worth about INR102bn (USD1.5bn), plus interest dating back to 2007 totalling INR188bn (USD2.8bn), on transactions linked to its earlier restructuring. India says that Cairn failed to pay capital gains tax on transactions undertaken to effect the group reorganization, which were required to enable the CIL IPO in 2007.

Subsequently CIL merged with an entity from the Vedanta Resources group, creating a combined entity Vedanta Ltd (VIL). The Cairn group has a shareholding of approximately five percent in this new entity, after its shares in CIL were converted into new units in the merged entity. It is seeking to sell these shares but has been blocked from doing so.

Indian authorities are seeking the assessed tax from the Cairn group's shareholding in this entity and have so far prevented its sale, pending the completion of an ongoing battle for the tax in the courts. It had proposed that it would sell Cairn's shares to gain access to the amount.

In the latest update, Cairn said: "International arbitration proceedings are well advanced with the final hearing of Cairn's claim under the UK-India Bilateral Investment Treaty scheduled for August 2018 in The Hague. The Tribunal has stated that it will make appropriate arrangements to progress with the drafting of the award as expeditiously as possible after the final hearing. Cairn is currently unable to access the value in its ~five percent shareholding in Vedanta Limited (VL), valued at USD1.1bn at December 31, 2017, and the Indian Income Tax Department (IITD) continues to pursue enforcement of the tax demanded."

It added: "…Cairn has a high level of confidence in its case. In addition to resolution of the retrospective tax dispute, Cairn's request for relief to the arbitration panel is seeking damages equal to the value of Group's residual shareholding in CIL in 2014 plus further assets seized since (approximately USD1.3bn)."

TAGS: court | Energy | tax | India | interest | law | United Kingdom | enforcement | legislation | transfer pricing | Investment | Invest | Investment | Tax

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