Cairn Energy wants $ 5.6 billion compensation from India for ’unlawful’ tax demand

The Economic Times | 13 July 2016

Cairn Energy wants $5.6 billion compensation from India for ’unlawful’ tax demand

NEW DELHI: Cairn Plc has claimed compensation of $5.6 billion from India in legal proceedings against the retrospective tax demand and said it would never have chosen London for its IPO if it had an inkling India may change rules to levy capital gains tax on "routine transfer" of shares.

Cairn initiated arbitration proceedings after the Indian authorities demanded Rs 10,247 crore from Cairn Plc for what they said were capital gains arising from restructuring of operations preparatory to the initial public offering of Cairn India, which raised $2 billion from what was then India’s biggest IPO.

It has urged the arbitration authority to "order India to compensate claimants in an amount equal to total harm suffered by claimants as a result of its breaches of the treaty - no less that $5,587,200 to be paid in a freely convertible currency" with additional interest or penalties derived from "unlawful tax demand".

The British explorer has transferred control of its Indian subsidiary, Cairn India, to Vedanta group, but had retained a 10% holding for some time but these shares were frozen by the tax department, leading to a huge fall in market value of Cairn Plc. The company says this action forced it to lay off 40% of staff.

Cairn Plc said retrospective taxation law was "an unfortunate coup of politics over the rule of law". In its submission to the arbitration panel, Cairn Plc said that in 2006 it explored an IPO either in India or a UK stock exchange, "both of which were essentially equivalent in economic terms" but it opted for the Indian market with the view that "Indianizing" the business would be a better social policy for the Scottish firm operating in India.

"If Cairn had any idea that India might later change its source rule to impose capital gains tax on routine transfers of shares in non-Indian companies - and retroactively seek to collect an amount of tax that would render the entire IPO transaction value-destructive - Cairn would not have undertaken the reorganization or entrusted its listing to the Indian markets," it said. "It would instead have created a different transactional structure and pursued an IPO on a UK exchange," the company said.

Cairn Plc also cited the retrospective taxation case on Vodafone and said the Indian prime minister had assured his UK counterpart "there is no retrospective application of taxation" and that Vodafone would have the "full protection of law".

The British company also found demand timing suspicious as action by authorities began a day after Cairn India announced share buyback that would have increased Vedanta’s majority stake in Cairn India.

"It appears that the income tax authority was searching for a pretext to apply the retroactive amendment to the corporate reorganization in 2006 - and to do so before Cairn had the chance to sell the last remaining portion of its investment in India and exit the country."

"The only evasion that took place in relation to tax enforcement proceedings was the attempt by income tax authority to avoid the clear and plain language and settled meaning of the ITA 1961 that prevailed at the time the restructuring occurred." Indian government has to respond to Cairn’s demand by November.