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Cairn, govt discuss LTCG tax and Vivad se Vishwas scheme

By Dilasha Seth & Jyoti Mukul
February 22, 2021 15:31 IST
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Cairn wants a quick solution to its tax dispute to avoid prolonging and exacerbating the negative issue.

During a series of hectic talks between Cairn Energy and the Indian government over the $1.2-billion arbitration award in favour of the former last week, a slew of options was proposed by the two sides, including computation of capital gains and participation in the Vivad se Vishwas (VsV) dispute resolution scheme.

The government is likely to go ahead and appeal against the arbitration award by a Permanent Court of Arbitration at The Hague before March 21, indicated finance ministry officials.

 

Cairn Energy Plc on Sunday said it was hopeful that an acceptable solution to its tax dispute with the Indian government could be found to avoid prolonging and exacerbating the ‘negative issue’ for all parties.

The company said it was clear it should continue to take all necessary steps to protect the interests of its shareholders.

The energy major is learnt to have raised concerns over the tax computation of the 2006-07 deal, which it felt should have been computed on a long-term capital gains (LTCG) basis instead of short-term capital gains (STCG), resulting in a tax liability of Rs 1,800-2,000 crore, instead of the Rs 10,500-crore tax demand.

The government has emphasised that while it welcomed Cairn’s move to reach out for a resolution, any dispute resolution to be sought by Cairn will have to be within already existing laws.

Sources pointed out that Cairn invested in India in 1998 and exited in 2006-07, which would have attracted LTCG at the rate of 10 per cent or 20 per cent, including indexation.

However, in order to circumvent this liability, Cairn created layers of subsidiary firms in reorganising its India business through the creation of Cairn UK Holdings (CUHL) in 2006, but ended up attracting STCG tax.

Cairn had earlier raised this in its argument at the income-tax appellate tribunal (ITAT), which it subsequently lost.

The solution could lie in re-computing the tax demand on LTCG basis, informed a source.

“Notwithstanding and without prejudice to our rights under the international arbitration award, we have discussed a number of proposals with the aim of finding a swift resolution that could be mutually acceptable to the Govern­ment of India and the interests of Cairn’s shareholders.

"Assu­ming such a resolution can be achieved, we look forward to being able to move on to further opportunities to invest in India, which continues to import a majority of the energy sources it consumes,” said Cairn Energy in a statement.

The Government of India, on its part, asked it to come under the VsV scheme — the window for which is open till February 28 after four extensions.

The scheme provides for settlement of disputed tax, disputed interest, disputed penalty or disputed fee in relation to an assessment or reassessment order on payment of 100 per cent of the disputed tax and 25 per cent of the disputed penalty or interest or fee.

The taxpayer is granted immunity from levy of interest, penalty, and institution of any proceeding for prosecution of any offence under the I-T Act in respect of matters covered in the declaration.

In fact, in 2016 the government had offered Cairn Energy settlement of the retrospective tax dispute through its one-time tax dispute resolution scheme, which provided for waiving interest and penalties if the principal amount was paid.

“The most reasonable solution for Cairn will be to participate in the VsV scheme.

"The window is still open. They can come and declare under the scheme,” said a government official.

The company, however, has in the past ruled out co­ming in as part of this scheme.

The case pertains to the Rs 24,500-crore tax demand on capital gains made by the oil major in reorganising its India business in 2006-07.

The Indian government had lost an international arbitration case to energy giant Cairn Plc under the retrospective tax legislation amendment in a verdict on December 21.

The firm said the freezing of its assets in 2014 to enforce a retrospective tax measure had been extremely negative for all parties, and that it was “very keen to be able to put this legacy matter behind and move forward positively”.

An international arbitration seated at The Hague and constituted under the terms of the UK-India bilateral investment treaty (BIT) has ruled conclusively on the matter and issued a final and binding award in Cairn’s favour, ordering the refund of the value of the assets taken, being $1.2 billion, plus significant interest and costs, noted the company.

“That arbitration also ruled decisively that this matter falls within the jurisdiction of the UK-India treaty, having heard arguments from the parties on that subject.

"We have had cordial and constructive discussions in Delhi over the past few days with officials from the ministry of finance,” it added.

Cairn said it enjoyed a long and successful history operating in India, investing billions of dollars and the business it created in India has generated more than $20 billion in revenue for the government.

On June 26, 2006, Cairn first created CUHL and transferred the Indian assets to it. In retu­rn, it got 221.44 million shares of CUHL on June 30, 2006.

It got another 29.78 million shar­es for sale of £29.78-million debt on September 1, 2006.

The tax department took a view that STCG tax should apply, given CUHL had acquired 251.22 million shares of Cairn India Holdings at the cost of £251.22 million in August-September 2006.

The same was then sold to the newly created Cairn India within a few months.

The STCG of Rs 24,503 crore at the hand of CUHL was confirmed by the ITAT in March, following which a demand note was sent, seeking Rs 10,247 crore.

While both sides hardened their stand, with Cairn Energy filing for enforcement of the December arbitration award against the Indian government, India’s revenue department has been readying to file an appeal against the award.

It is likely to file an appeal at The Hague by March 10 and is in talks with senior Dutch lawyers.

New Delhi has time till March 21 to file an appeal in accordance with the 90-day window.

The award will likely be contested on two key grounds — jurisdiction and international public policy.

Cairn Energy Plc’s chief executive officer Simon Thomson had, however, in a video message expressed willingness to meet Finance Minister Nirmala Sitharaman, but she passed it on to finance secre­tary Ajay Bhushan Pandey.

Cairn Energy has filed a case in a US district court to implement the arbitration award.

Earlier, the Edinburgh-based company had filed a similar case in a Dutch court.

In the appeal, India is expected to take a stand that the government has the sovereign right of taxation and private individuals cannot decide on that.

According to the Centre, the award falls outside the domain of BIT and beyond the jurisdiction of international arbitration.

Also, the government is likely to invoke international public policy, arguing that Cairn did not pay tax in any jurisdiction across the globe.

Photograph: Parth Sanyal/Reuters

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Dilasha Seth & Jyoti Mukul in New Delhi
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