Income Tax Appellate Tribunal(ITAT) Confirms Rs 10,247-cr tax demand on Cairn UK Thursday March 09,2017

The Income Tax Appellate Tribunal, in an order passed on Thursday March 09,2017 has ruled that Cairn UK Holdings will have to pay ₹10,247 crore in short term capital gains tax on an internal share sale dating back more than ten years.

The tribunal, however, rejected the tax department’s demand for back-dated interest on this liability of ₹18,800 crore, saying the interest only came into effect because of a retrospective amendment made to the Finance Act, 2012. The company could not have foreseen such an amendment at the time, the tribunal held.

The tax dispute between the Indian government and Cairn Plc has also been the subject of international arbitration from 2014. But the tribunal has said the tax liability case could be heard locally, without prejudice to the arbitration.

This latest order, though, is likely to make matters uncomfortable between the UK and Indian governments. The former has been lobbying for the tax liability to be pardoned under a bilateral tax treaty.

The tax liability goes back to 2006, when Cairn India acquired the local assets of Cairn UK Holdings, giving the UK firm a 69 per cent equity holding in return. While the I-T department said the value of this indirect transfer of shares was based on local assets, including highly productive oilfields in Rajasthan and the Krishna-Godavari basin, the UK company asserted that it was an internal re-grouping and hence not subject to Indian taxes.

The share transfer came to light when Cairn India was publicly listed in 2007.

In August 2010, Anil Agarwal’s Vedanta Resources Plc acquired a controlling interest in Cairn India. Cairn Energy Plc still holds a 9.82 per cent stake in Cairn India.

In its submission to the tribunal, Cairn Plc said Cairn India Holdings Ltd. is incorporated in Jersey. The gain, if any, on a transfer of shares is not even deemed to be taxed in India.

The tribunal, however, ruled that the real effect of the transfer of shares of Cairn India Holdings Ltd will be the transfer of control of the assets of subsidiaries in India, thereby making the capital gain taxable in India.

Cairn also tried to liken its tax dispute to the $2-billion tax penalty imposed on Vodafone International Holdings in 2007 for payments the telecom operator had made to Hutchison Telecom. The Supreme Court had thrown out the tax case against Vodafone in January 2012. (The retrospective amendment to the Finance Act mentioned earlier was made after this judgement; the tax case is now under international arbitration.)

However, the tax department distinguished the Cairn tax dispute from that of Vodafone’s. “In the case of Vodafone,” it contended, “it was payment from (one) non-resident to (another) non-resident. But in the present case, a resident company i.e. Cairn India Ltd has made payment of ₹26,681.87 crore to the Appellant (Cairn UK Holdings). In the present case, money was actually remitted out of India (as consideration) to purchase the shares.”