I-T Dept Lifts Freeze on Cairn Energy Payout, But Bar on Stake Sale Stays

The 9.8% shareholding in Cairn India was originally attached by the tax department in January 2014

In a relief for Cairn Energy, the tax department in India has agreed to lift the freeze on the British oil explorer being paid dividends by its erstwhile subsidiary, Cairn India.

However, the company will still not be able to sell the residual stake, pending resolution of the tax dispute with the authorities. The department had last year made a demand of Rs 29,047 crores on Cairn Energy for alleged capital gains on a 10-year-old internal re-organisation of its India unit. 

It barred Cairn Energy from selling the company’s residual 9.8 per cent stake in Cairn India, its erstwhile subsidiary which it had in 2011 sold to mining billionaire Anil Agarwal’s Vedanta group, during the pendency of the dispute. It later also froze payment of dividend by Cairn India to Cairn Energy. 

The 9.8 per cent shareholding in Cairn India was originally attached by the tax department in January 2014 and the company continues to be restricted from selling those shares. The demand was challenged by Cairn Energy through an international arbitration, where it also made a case against the dividend freeze, as it was not part of the original assessment order of January 2014.

“Confirmation received via the international arbitration that dividends of $31 million due from Cairn India Ltd (CIL) are no longer restricted,” Cairn Energy said in its 2016 earnings statement. The company said it had asked CIL to immediately release the sum.

“Cairn UK Holdings Ltd (CUHL), a direct subsidiary of Cairn Energy Plc, is in receipt of an assessment order from the Indian income tax department relating to the intra-group restructuring undertaken in 2006 prior to the IPO of CIL in India, which cites a retrospective amendment to Indian tax law introduced in 2012,” the statement said.”Cairn strongly contests the basis of this attempt to retrospectively tax the group for an internal restructuring.”

The assessment order levies tax of Rs 10,247 crore plus interest backdated to 2007, totalling Rs 18,800 crore. “The total assets of CUHL have a value at the balance sheet date of $749.3 million (comprising principally the group’s 9.8 per cent shareholding in CIL) and any recovery by the Indian authorities would be limited to such assets,” it said.

The company is pursuing its right under Indian law to appeal the assessment, both on the basis of taxation and the amount. The seat of arbitration has been agreed to as The Hague in Netherlands and Cairn filed its statement of claim in June 2016, that applying the retrospective amendment to Cairn and seizing $1 billion worth of CIL shares was in breach of the UK-India Investment Treaty obligations of fair and equitable treatment and its protection against expropriation.

“Cairn has asked the arbitration panel either to order India to withdraw its unlawful tax demand and compensate Cairn for the harm suffered by the seizure of the CIL shares, being not less than $1.1 billion or, if the tax demand remains in place, compensate Cairn for the quantum of the tax assessment and the harm suffered by the seizure of the CIL shares, being together not less than $5.6 billion,” their statement added.

Reference - http://www.business-standard.com/article/companies/tax-dept-lifts-freeze-on-dividend-payout-says-cairn-energy-117030800731_1.html