In the latest salvo between Indian authorities and the Cairn Energy Group in the dispute concerning the controversial 2012 retrospective amendment to Indian tax law, Cairn has disclosed that the Indian Government has laid claim to a USD53m dividend payment that the group says it is owed from its shareholding in its India-based subsidiary, Cairn India Limited.
The dispute concerns an intra-group restructuring that Cairn undertook in 2006, to facilitate the Initial Public Offering (IPO) of its subsidiary in India, Cairn India Limited (CIL).
In 2012, India retrospectively amended Indian tax law. The amendment was given retroactive effect from 1961, the year in which India’s current income tax legislation was introduced. It was introduced after a ruling from the Supreme Court in the Vodafone International Holdings BV case, in which the court said that transfers of non-resident companies made by non-residents should not attract Indian capital gains tax. Indian lawmakers defied the ruling by amending Section 9 of the Income Tax Act 1961 with retroactive effect.
Although the circumstances for Cairn’s affected transactions are different, India has likewise used the retrospective amendment to assess tax worth about INR102bn (USD1.5bn), plus interest dating back to 2007 totalling INR188bn (USD2.8bn), on transactions linked to its earlier restructuring. India says that Cairn failed to pay capital gains tax on transactions undertaken to effect the group reorganization, which were required to enable the CIL IPO in 2007.
Subsequently CIL merged with an entity from the Vedanta Resources group, creating a combined entity Vedanta Ltd (VIL). The Cairn group has a shareholding of approximately five percent in this new entity, after its shares in CIL was converted into new units in the merged entity.
Indian authorities are seeking the assessed tax from the Cairn group’s shareholding in this entity and has so far prevented its sale, pending the completion of an ongoing battle for the tax in the courts.
The case is being heard in international arbitration under the UK-India Bilateral Investment Treaty, sought by Cairn in 2015. A final hearing is expected to be held in January 2018. After this ruling, a decision on the sale of Cairn’s shares would be a made.
According to a new update from Cairn, on June 9, 2017, the international tribunal issued a formal order “memorializing the numerous confirmations from the Government of India that the dividends from the India-based entity were no longer restricted and authorizing that order to be provided to CIL (now VIL),” so that the dividends (due to Cairn for the period 2014-2017) could be distributed.
On June 16, 2017, however, the Indian Income Tax Department issued an order to VIL directing it to pay over any sums due to Cairn to it. The Cairn group said sums due to it from VIL now total USD104m, including historical dividends of USD53m and a further dividend of USD51m after the merger of CIL and VIL.
Commenting, Cairn stated: “Notwithstanding this action by the Government of India, international arbitration proceedings are progressing in respect of the Group’s claim under the UK-India Bilateral Investment Treaty (the Treaty). Cairn is seeking full restitution for Treaty breaches resulting from the expropriation of its investments in India in 2014, the attempts to enforce retrospective tax measures, and the failure to treat the company and its investments fairly and equitably.”
“Cairn has a high level of confidence in its case under the treaty and, in addition to resolution of the retrospective tax dispute, its claim seeks damages equal to the value of the group’s residual shareholding in CIL at the time it was attached (approximately USD1bn).”