Cairn Energy, one of Europe’s leading independent oil and gas exploration and development companies has sought $5.6 billion in compensation from the Indian government for raising a retrospective tax demand of Rs 29,047 crore on 10-year old internal re-organisation of its India unit.
The Edinburgh-based company demanded withdrawal of the tax demand, sighting the fact that India had failed to uphold its obligations towards the UK-India Investment Treaty by not giving its investments in the country fair and equitable treatment. The company has filed an official “Statement of Claim” with an international arbitration panel headed by Geneva-based arbitrator Laurent Levy on June 28 regarding the matter.
According to sources, the Indian Government is expected to file its “Statement of Defense” in November and the hearing of the case is likely to begin from early 2017.
The Indian Income Tax Department had issued a tax assessment of Rs. 10,247 crore on Cairn Energy in 2014 following the company’s transference of its India assets to a new subsidiary, Cairn India, in 2006.
This year, a final assessment order was issued that included an interest of Rs. 18,800 crore on top of the principal tax amount. In 2011 the company had sold its majority stake in Cairn India to mining giant Vedanta Group for $8.67 billion. Cairn Energy still holds 9.8 per cent in Cairn India which the Income Tax Department has barred it from selling.
In the “Statement of Claim” issued by Cairn, the company said that while they had the option of listing Cairn India on the UK stock exchange, they decided to go local in the hopes of building one of the largest-ever IPOs in Indian history. But in order to do so, they had to re-organize their corporate structure significantly, and it is with this move that Cairn made capital gains of Rs 24,503.50 crore, thereby drawing the attention of the Income Tax Department of India.
However, the company says in their “Statement Of Claim” that they had no idea that India might later change its source rule to impose capital gains tax on routine transfer of shares in non-Indian companies and further seek to collect a tax amount that would render the entire IPO transaction value-destructive. Had they anticipated this, they say they would have refrained from either listing the company to Indian markets or from undertaking the re-organization, both of which have been approved by all regulatory authorities including the Foreign Investment Promotion Board.
Cairn Energy said no capital gains tax was due under the law in force in 2006 when the restructuring was done. They also contend that there was no tax due on an internal restructuring and that its international shareholders have suffered material losses from the share attachment. The attachment also severely impacted the company’s financial capacity to invest in oil and gas assets and led to cutting of workforce by 40 per cent.
The British firm challenged the tax assessment by seeking an international arbitration under the UK-India Investment Treaty. A three-member Arbitration Tribunal was constituted and its seat was decided to be in The Hague, the Netherlands. They have claimed full compensation for the $1 billion value lost following the tax notice in addition to the freezing of its 9.8 per cent shares in Cairn India.
Cairn Energy has named former Bulgarian minister Stanimir Alexandrov as its arbitrator in the tax dispute while India has appointed Singapore-based lawyer J. Christopher Thomas as its arbitrator.