Cairn Energy seeks $5.6 billion compensation from Indian government
What's the story
UK-based oil and gas company Cairn Energy sought $5.6 billion from the Government of India in compensation for issuing a tax demand of Rs.29,000 crore pertaining to its 10-year-old internal reorganization. Cairn filed a 160-page statement of claim with a global arbitration body. Cairn stated that by not treating its investments equitably, India failed to stand by its commitments under the UK-India Investment Treaty.
24 Jan 2014
Cairn Energy's Indian operations to be probed
UK-based explorer Cairn Energy was forbidden from selling a $950 million-worth residual holding in Cairn India (erstwhile subsidiary) until the completion of a tax investigation. The company wanted to raise funds for exploration but faced a lengthy investigation into its Indian operations from 2007, when Cairn India was established. Mining company Vedanta bought 58.5% holding in Cairn India for $8.67 billion in 2011.
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Cairn Energy has been contacted by Indian tax authorities
Cairn Energy, which still held a stake of 10.3% in Cairn India, had officially stated that Indian tax authorities had contacted the company. The company stated: "Cairn is co-operating to provide the necessary documentation and information as requested."
Probe
Possible probe over tax related to the IPO
Cairn India reported that tax authorities launched a probe over unpaid tax. Cairn India said it wasn't informed of the nature of the tax probe; however, it added that it might be related to the IPO. Income Tax officials imposed a tax of Rs.10,247 crore on the profit Cairn had made in 2006 while transferring its assets to Cairn India and listed the business.
Tax Demand
IT Department demands Rs.20,495 crore tax
In Mar'15, Cairn India had received an income tax notice of Rs.20,495 crore for failing to subtract withholding tax on alleged gains by Cairn UK Holdings, a subsidiary of Cairn Energy. The tax demand concerned the transfer of Cairn India Holdings Limited's shares by Cairn UK Holdings to Cairn India as a part of internal reorganization and facilitation of IPO of Cairn India.
Dec 2015
Cairn seeks $700m from Indian government, writes to Modi
Cairn Energy had announced it would seek a claim of $700 million from the Centre to compensate for the losses caused by government's actions in the $1.6 billion tax controversy. On 19 Dec'15, Cairn Energy wrote to Prime Minister Modi and sought coherence on the long-running retrospective tax dispute. Modi had earlier stated that his government wouldn't resort to retrospective taxation.
Feb-May 2016
Tax demand of Rs.29,000 crore, Cairn to pay Rs.1,537 crore
In Feb'16, the I-T Department served a tax demand of over Rs.29,000 crore to Cairn (Rs.18,000 crore interest). In Mar'16, Finance Minister Jaitley suggested a one-time dispute settlement scheme, in which companies pay only tax arrears and interest/penalty would be waived. In May'16, Cairn wanted to pay Rs.1,537 crore (15% of principal sum) and wanted the freeze on Cairn India shares to be lifted.
Compensation
Compensation equal to raised tax demand and Cairn's stake value
Cairn sought a compensation of $1.05 billion for the loss suffered by Cairn's 9.8% stake value in Cairn India. Total compensation ($5.6 billion) would be equal to the raised tax demand and Cairn's stake value in Cairn India. The Indian government would submit its defense statement to the three-member arbitration panel by Nov'16, and the evidential trial is reported to take place in 2017.
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Compensation for breaches of Investment Treaty
Cairn stated, "In the alternative, and should the Tribunal determine not to order India to refrain from enforcing its unlawful tax demand," loss of Cairn's stake value in Cairn India, penalties, and interest ($5.587 billion) should be compensated for breaches of the Investment Treaty.