CAIRN India Taxation Issue

PRESENTED BY: AALAP PANDYA (20135001) MRUGANDA SHAH (20135038) SWASTI BHATIA (20135056)

Introduction

Around eight years ago ,Edinburgh-based Cairn Energy created a new company Cairn India and

transferred all of its India assets to it.

Cairn India was incorporated in 2006 as a subsidiary of UK based Cairn Energy PLC.

It mainly focusses on acquired Oil & Gas Exploration business.

After transferring the assets, the company listed Cairn India on the stock exchanges through an

Initial Public Offer (IPO) in 2007.

According to Cairn, the transfer of assets was part of a reorganization exercise aimed at

enabling the IPO in 2007.

In 2011, Cairn Energy sold majority stake in its Indian arm to mining giant Vedanta for $8.67

billion and still holds 10 per cent stake in Cairn India.

Summary – Cairn India’s Taxation Issue

The Income Tax Department in India has slapped a $1.6 billion tax demand on British petroleum

explorer, Cairn Energy.

It all started eight years ago when Edinburgh-based Cairn Energy created a new company Cairn

India in 2006 and transferred all of its India assets to it. 

After transferring the assets, the company listed Cairn India on the stock exchanges through an

Initial Public Offer (IPO).

According to Cairn, the transfer of assets was part of a reorganization exercise aimed at enabling

the IPO in 2007.

In January 2014, the tax department contacted Cairn Energy to audit its finances and weigh tax

assessments for the financial year 2006-07. 

The company was also ordered not to sell its 10 per cent holding in Cairn India which was then

valued at $1.1 billion.

Summary – Cairn India’s Taxation Issue

the I-T Department had so far not raised a tax demand on Cairn Energy, it had ordered Cairn

India not to allow the transfer of UK firm's residual 10 per cent stake.

The tax authorities slapped the $1.6 billion (Rs 10,247 Crore) claim stating the firm allegedly

made capital gains of Rs 24,503.50 Crore when it transferred its India business to the newly

incorporated Cairn India in 2006.

Tax authorities are also understood to have stated Cairn Energy received Rs 26,681.87 crore for

the asset transfer against its entire investment of Rs 2,178.36 crore in the India business. 

The company has responded to the “disappointing” tax claim by filing a notice of dispute under

the UK-India Investment Treaty and the two sides are now headed for a round of negotiations

failing which an international arbitration panel will be constituted to adjudicate on the matter

Capital Gains

The Retroactive Amendment, and the imposition of capital gains tax, is not only contrary to relevant legal

standards, its application to Cairn is particularly unjust because the transactions at issue were internal to the

Cairn Group;

no shares or assets were sold to any third party nor were any capital gains earned," it said in the

communication to the government.

Had Cairn received any indication or had any reasonable cause to believe that its purely internal

transaction would be subject to capital gains tax in India, it would not have undertaken the

internal reorganisation," it said

Cont…

Indirect transfer is a transaction wherein the foreign company’s shares being sold

derives, directly or indirectly, its value substantially from assets located in India.

In this case, Cairn Energy transferred its foreign subsidiary to Cairn India and the foreign

subsidiary derived its value from assets located in India. As per the provisions of section

9(1)(i) (as amended by Finance Act 2012),

 a capital asset being any share in a company incorporated outside India shall be deemed to

have been situated in India, if the share derives, directly or indirectly, its value substantially

from the assets located in India.

 So the transfer of foreign subsidiaries qualified as indirect transfer is liable to tax in India

as per the amended provisions of section 9(1)(i) of the Act.

Viewpoint of Cairn India’s CEO

Cairn Energy CEO, Simon Thomson has said the company has consistently confirmed it has been fully compliant with all relevant legislation and paid all applicable taxes in India and Cairn Energy is confident of its position under the UK-India investment treaty.

Thomson also said the current issue is confined to Cairn Energy’s interests in India and the group remains well funded to deliver all of its objectives and commitments and looks forward to moving with its strategy while this issue is resolved under legal process.

The company said the actions of tax authorities breach parts of its obligations under the UK-India Investment Treaty. These include obligation under Article 3 to "create favourable conditions", and ensure "fair and equitable treatment" and "full protection and security". It also cited Article 5 and Article 7, which the company feels should insulate it from retrospective taxes and restrictions on selling shares.

The company's chief executive Simon Thomson sent a "notice of dispute" under Article 9 of the treaty on March 11. It was addressed to Prime Minister Narendra Modi, Finance Minister Arun Jaitley, Law Minister Ravi Shankar Prasad and External Affairs Minister Sushma Swaraj. 

Viewpoint of FM – Arun Jaitely

Finance minister Arun Jaitley has said that the Narendra Modi-led NDA government would not move on retrospective taxation, and would let previous tax notices and what he called 'legacy issues' from the earlier government be sorted through India's judicial system.

Conclusion