British oil firm Cairn Energy plc has seen its cost of fighting an arbitration against the Indian government imposing retrospective tax nearly tripling in 2018 even as it lost investments and tax refunds pending final award.
Cairn in its latest annual report said administrative expense towards Indian tax arbitration has risen to $22.9 million (about Rs 158.4 crore) in 2018 from $8.1 million (about Rs 56 crore) in 2017.
The company which gave the country its biggest oil discovery received a notice from the Income Tax Department in January 2014, requesting information relating to the group re-organisation done in 2006. Alongside, the Income Tax Department attached the company's near 10 per cent shareholding in its erstwhile subsidiary, Cairn India. In March 2015, the tax department sought Rs 10,247 crore in taxes on alleged capital gains made by the company in the internal reorganisation.
"In January 2014, Cairn UK Holdings Limited (CUHL), a direct subsidiary of Cairn Energy PLC, received notification from the Indian Income Tax Department (IITD) that it was restricted from selling its shareholding in Cairn India Ltd (CIL); at that time the shareholding was approximately 10 per cent and had a market valuation of Rs 6,000 crore," the annual report said. "The notification made reference to retrospective Indian tax legislation enacted in 2012, which the IITD was seeking to apply to the 2006 Transactions," it added.
Cairn had in 2010-11 sold Cairn India to Vedanta Ltd. Following the merger in April 2017 of CIL and Vedanta Ltd, CUHL's shareholding in CIL was replaced by a shareholding of about 5 per cent in Vedanta Ltd issued together with preference shares.
"In addition to attaching CUHL's shares in Vedanta Ltd, the IITD seized dividends due to CUHL from those shareholdings totalling Rs 1,140 crore ($164.2 million). The IITD has also notified Cairn that a tax refund of Rs 1,590 crore ($249.0 million) due to CUHL as a result of overpayment of capital gains tax on a separate matter in 2011 has been applied as partial payment of the tax assessment of the 2006 Transactions," the annual report said.
Cairn in 2015 initiated an international arbitration to challenge the retrospective taxation.
Pending final award, the tax department sold Cairn's shares in Vedanta to recover part of the tax demand.
"To date 99 per cent of CUHL's shareholding has been liquidated by the IITD," it said adding the principal tax due, according to the tax department on the 2006 transactions is Rs 10,247 crore plus applicable interest and penalties.
Interest is currently being charged on the principal at a rate of 12 per cent per annum from February 2017, although this is potentially subject to the IITD's Indian court appeal that interest should be back-dated to 2007.
Penalties are currently assessed as 100 per cent of the principal tax due, although this is subject to appeal by CUHL that penalties should not be charged given the retrospective nature of the tax levied.
"The Group has legal advice confirming that the maximum amount that could ultimately be recovered from Cairn by the IITD, in excess of the assets already seized, is limited to the value of CUHL's assets, principally the remaining ordinary shares in Vedanta Ltd," the report said.
In March 2015 Cairn filed a Notice of Dispute under the UK-India Bilateral Investment Treaty, seeking restitution of the value effectively seized by the IITD in and since January 2014.
"Cairn's principal claims are that the assurance of fair and equitable treatment and protections against expropriation afforded by the Treaty have been breached by the actions of the IITD, which is seeking to apply retrospective taxes to historical transactions already closely scrutinised and approved by the Government of India. The IITD has attached and seized assets to try to enforce such taxation," it said.
It wants the effects of the tax assessment be nullified and that Cairn should receive recompense from India for the loss of value resulting from the 2014 attachment of CUHL's shares in CIL and the withholding of the tax refund, which together total $1.4 billion.
The arbitration formally commenced in January 2016 following agreement between Cairn and India on the appointment of a panel of three international arbitrators under the terms of the treaty. "All formal hearings and submissions have now been made and the tribunal is in the process of drafting its award," the annual report said.