Cairn Energy adds $249 mn to compensation claim in retrospective tax dispute

Energy Infra Post | 22 August 2017

Cairn Energy adds $249 mn to compensation claim in retrospective tax dispute

UK-based Cairn Energy Plc has increased its compensation claim by $249 million in the retrospective dispute case after the income tax department adjusted tax refund due to the oil explorer towards settlement of its tax liabilities.

Cairn had sought $5.6 billion in compensation from the Indian government for raising a retrospective tax demand of Rs10,247 crore on a decade old internal reorganisation of its India unit before an international arbitration tribunal in July last year.

According to Cairn, the government had claimed Rs18,800 crore as interest on the principal tax demand. But the claim was rejected by the Income Tax Appellate Tribunal.

“Following that, the Income Tax Department issued a revised demand including interest running from February 2016 i.e. 30 days after the date of the assessment order. That interest currently amounts to Rs1,440 crore (approximately $224 million),” Cairn has said in its half-yearly statement said.

To recover this, the tax department “seized” $104.7 million of dividend income due to it from Vedanta Ltd, wherein it holds about 5% stake, which it has now written off.

“A tax refund in respect of financial year 2011-12 in the amount of Rs1,590 crore ($249 million) which became due to Cairn as a consequence of a successful appeal by the company to the Delhi High Court has also been directed to the Income Tax Department to be set against the 2006-07 (retrospective tax) liability and Cairn’s claims under the international arbitration have been adjusted to include this,” the Scottish oil explorer said.

The company said it commenced international arbitration proceedings against India under the UK-India Bilateral Investment Treaty in 2015 for “expropriating Cairn’s property without adequate and just compensation, denying fair and equitable treatment to Cairn in respect of its investments and restricting Cairn’s right to freely transfer funds in connection with its investment.”

In its Statement of Claim before the arbitration tribunal, it has stated that applying the retrospective amendment and seizing $1 billion worth of shares was in breach of the UK-India Bilateral Investment Treaty’s requirements of fair and equitable treatment and its protections against expropriation.

“Cairn has asked the arbitration panel either to order India to withdraw its unlawful tax demand and compensate Cairn for the harm suffered by the seizure of the shares, being not less than $1.1 billion (plus costs); or, if the tax demand remains in place, compensate Cairn for the quantum of the tax assessment and the harm suffered by the seizure of the shares.

These claims were subsequently updated to include the $249 million tax refund,” the statement said. The company said based on detailed legal advice, it is confident that it will be successful in such arbitration. “The total assets of Cairn have a current value of $863.1 million (comprising principally the group’s shareholding in Vedanta Ltd) and any recovery by the Indian authorities would be limited to such assets,” the statement added.