Cairn Energy files notice against India in $1.6 billion tax dispute

Cairn Energy has filed a dispute notice against the Indian income tax department in the $1.6-billion tax dispute for the fiscal year 2006-07.

“Cairn confirms it has instructed counsel to file a Notice of Dispute under the UK-India Investment Treaty in order to protect its legal position and shareholder interests having received a draft assessment order from the Indian Income Tax Department,” Cairn said in an intimation to the London Stock Exchange.

Since the original contact from the Income Tax Department in January 2014, Cairn has continued to confirm with its advisers that throughout its history of operating in India, the company has been fully compliant with the tax legislation in force in each year and paid all applicable taxes, Cairn said.

Cairn strongly contests the basis of the draft assessment and the Notice of Dispute is supported by detailed legal advice on the strength of the legal protections available to it under international law. Under the terms of the UK-India Investment Treaty, the Government of India and Cairn are now required to enter a period of negotiations to seek a resolution to the dispute. To the extent that a satisfactory resolution is not reached during that period, an international arbitration panel will be constituted to adjudicate on the matter, Cairn said.

Shares of Cairn were trading down nearly 18 per cent at the time of going to press. In January 2014, Cairn had received notices from the Income Tax Department of India citing the 2012 Retrospective Legislation and requesting information relating to the group reorganisation in 2006.

Cairn has been unable to sell its 10 per cent stake in Cairn India (CIL) due to the tax dispute. In 2011, Vedanta had acquired a majority stake in Cairn India for over $8.5 billion following which Cairn stake in the Indian arm had reduced to around 10 per cent.
“Cairn continues to be restricted by the Indian Income Tax Department from selling its 10 per cent shareholding in CIL, currently valued at approximately $700 million. Supported by detailed legal advice, on the strength of the legal protections available to it under international law, Cairn does not intend to make any accounting provision in respect of the draft tax assessment. In addition, Cairn will seek restitution of losses resulting from the attachment of its CIL stake since 2014, Cairn said.

“Cairn has consistently confirmed that it has been fully compliant with all relevant legislation and paid all applicable taxes in India and we are confident of our position under the UK-India Investment Treaty,” Simon Thomson, Chief Executive, Cairn Energy said.

Against a backdrop of regular engagement with the government since January 2014, it is very disappointing to have received a draft assessment order at this time, Thomson added.