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Now Cairn India slapped with over $3.2B withholding tax demand

13 March, 2015

Anil Agarwal-led Vedanta Resources controlled energy firm Cairn India Ltd has got a withholding tax call for around Rs 20,495 crore ($3.26 billion) half of which constitutes interest, for an eight-year-old transaction involving its former parent, it said on Friday.

This comes two days after UK’s Cairn Energy, former parent of Cairn India and currently a minority shareholder in the firm, received a draft assessment order over pending tax dues worth $1.6 billion.

Cairn India said it has received the notice for an alleged failure to deduct withholding tax on alleged capital gains arising during 2006-07 in the hands of Cairn UK Holdings Limited (CUHL), its erstwhile parent and a subsidiary of Cairn Energy Plc.

This was in respect of the transaction of CUHL transferring the shares of Cairn India Holdings Limited (CIHL) to Cairn India Limited as part of internal group reorganisation in 2006-07 to facilitate the IPO of Cairn India Limited.

It said the total demand is Rs 20,495 crore (comprising tax of Rs 10,248 crore and interest of Rs 10,247 crore). Cairn India said in the filing, it does not agree with the tax demand and will pursue all possible options to protect its interest.

Earlier this week, Cairn received a  $1.6 billion tax notice. It had originally received a communication for the tax authorities in January 2014 when 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.

Cairn Energy has claimed that it has been fully compliant with the tax legislation in force in each year and paid all applicable taxes. Further, it added that the company did not intend to make any accounting provision relating to the draft tax assessment it has received.

Indian tax authorities claimed that 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.

After the transfer, it listed Cairn India on the stock exchanges through an IPO in 2006, raising about Rs 8,616 crore.

In 2011, Cairn Energy sealed its deal to divest controlling stake in Cairn India to mining major Vedanta Resources for $8.67 billion. It still owns 9.8 per cent stake in Cairn India which currently valued at about $700 million. Cairn India has been directed by the tax authorities not to allow the transfer of UK firm’s residual stake.

Shares of Cairn India were trading at Rs 229.90, down 1.67 per cent on BSE in a weak Mumbai market on Friday at 1.14 PM.

Retrospective taxation has received strong criticism from domestic and overseas investors.

In various forums Indian Finance Minister Arun Jaitley had said he does not want to levy any retrospective taxation and had previously come out strongly against the previous government’s moves to go after such tax cases which had created uncertainty and negative sentiment about investing in India.

Various MNCs have received such tax notices in the past.

Most recently, the government decided not to appeal against a Bombay High Court order which ruled in favour of telecom giant Vodafone in a tax dispute case. This had signalled the government’s stance on the issue. But the latest case with Cairn means the uncertainty for foreign investors continues.

(Edited by Joby Puthuparampil Johnson)


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Now Cairn India slapped with over $3.2B withholding tax demand

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