An income tax tribunal has upheld a capital gains tax demand of Rs 10,247 crore raised by the Income Tax Department on oil major Cairn, UK under the controversial retrospective amendment to the Income Tax Act. Experts fear that this may not go down well with foreign investors at a time when the Modi government is wooing foreign investment.
In an order passed on Thursday, the Income Tax Appellate Tribunal (ITAT), Delhi, however, gave relief to the company on interest charges of Rs 18,800 for delayed payment of tax on the ground that the case related to retrospectivity.
The tax will have to be paid by the company unless it decides to challenge the order in a high court, said experts explaining the order. Side by side, an international arbitration proceedings between Cairn, UK and India may continue.
ITAT observed that keeping the issue unnecessarily pending on the plea that a related case is under international arbitration won’t be proper since there is no timeline available about the disposal of the case in arbitration proceedings. Also, ITAT observed that the tribunal's ruling can very well be applied to the arbitration proceedings.
A person close to the development the final hearings on the arbitration matter would happen in January 2018.
The tax is liable under the retrospective amendment of the Income Tax Act and as such may draw flak from foreign investors.
"Though the government has clearly stated the end of retrospective tax regime following a non adversarial tax approach, this tax demand is not likely to go down well with the foreign investors," said Rakesh Nangia, Managing Partner, Nangia Co.
The tax liability was under section 9(1) (i) of the I-T Act which says that indirect transfer of assets situated in India would be liable to be taxed in the country if the value of such assets exceeds Rs 10 crore and represents at least 50 per cent of the total value of assets owned by the company.
Naveen Wadhwa of Taxmann says that any business re-organisation which falls under this sections would be liable to be taxed in India, as per the ITAT order.
An official spokesperson of Cairn Energy Plc said the company had no comments to offer on today's ITAT order.
The demand was in respect of Cairn UK transferring shares of Cairn India Holdings to Cairn India as part of an internal group reorganization in 2006-07, giving rise to different interpretations as to whether the UK-based company made capital gains, preceding an initial public offering (IPO) of shares by Cairn India.
I-T Department says that Cairn UK made a capital gain of Rs 24,503.50 crore, which was contested by Cairn UK.
Before the Cairn India IPO, the India operations of Cairn Energy were owned by a company called Cairn India Holdings-Cayman Island and its subsidiaries. Cairn India Holdings was a 100% subsidiary of Cairn UK Holdings, which was a 100% subsidiary of Cairn Energy.
At the time of the IPO, the ownership of the India assets was transferred from Cairn UK Holdings to a new company – Cairn India. In 2006 Cairn India acquired 100% share capital of Cairn India Holdings from Cairn UK Holdings. In exchange 69% shares in Cairn India were issued to Cairn UK Holdings. Hence, Cairn Energy, through Cairn UK Holdings held a 69% stake in Cairn India.
Later in 2011, Cairn Energy sold Cairn India to mining billionaire Anil Agarwal’s Vedanta group, barring a minor stake of 9.8 per cent. It wanted to sell the residual stake as well, but was barred by the income tax department from doing so. It also froze payment of dividend by Cairn India to Cairn Energy. The department has agreed to lift that freeze recently.