The Anil Agarwal owned Cairn India, which owns and operates, India’s most potent and prolific oilfields in Rajasthan and the KG Basin, has had a ‘multi layered’ history to evade taxes, as the taxman alleges. These oil assets of Cairn India, were originally owned by Cairn UK, through a maze of step down subsidiaries, located in tax havens. In 2006, the shares of the subsidiary that owned these valuable Indian assets, were acquired by Cairn India, for a sum of Rs. 26,682 crores. Through this share transfer, Cairn India acquired the India assets of Cairn UK. The British company termed such sale of shares as a mere internal reorganisation of shares, owned by a company located in Jersey and thus claimed it to be tax exempt in India. Cairn India thus remitted this huge sum to Cairn UK, without even deducting tax at source. This ‘internal regrouping’ came to light in 2007, when Cairn India was public listed. The Anil Agarwal owned Vedanta conglomerate acquired Cairn India in August 2010. It was thus a typical transfer of shares of a company based abroad, resulting in transfer of ownership of its Indian assets. At that time, the now infamous case of Vodafone India was doing the round of courts, resulting in a victory for Vodafone UK in the Supreme Court, only to be undone by the much reviled retrospective amendment of the tax laws in 2012.
The 2012 retrospective amendment, by which share transfers abroad, were now subject to tax in India, gave sufficient ammo to the tax department, (ITD), which raised a demand of Rs. 10,247 crores on Cairn UK in 2014, being capital gains tax on the 2007 transfer of shares. It also raised similar demands on Cairn India, for its failure to deduct tax at source, on such a huge remittance of capital gains. The ITD also froze the residual share holdings of Cairn UK in Cairn India, to recover taxes due to it. A shocked Cairn UK took recourse to the tax treaty with India, and initiated arbitration proceedings, claiming that such taxes are illegal. Cairn UK’s dismay is rooted in the fact that when it did such transfer of shares in 2007, it was not taxable under the then prevailing Indian tax code and that such liability has arisen due to a much later retrospective tax amendment, which is not fair. The matter went in appeal to the Indian Income Tax Tribunal, with Cairn pleading that such an internal regrouping of shares in 2007 gives rise to no taxable income in India. It also placed reliance on the judgement of the Supreme Court, in the case of Vodafone India. The ITD on the other hand vehemently argued that Cairn UK had consciously set up a layer of foreign subsidiaries, to transfer assets in India and evade tax deliberately. It also contended that unlike in the case of Vodafone, where no funds were remitted from India, in this case, Cairn India has remitted the sale proceeds of Rs. 26,682 crores to Cairn UK, without any TDS.
The Tax Tribunal in a recent order, upheld the arguments of the ITD and has ordered Cairn UK to pay the tax of Rs. 10,247 crores. It said that notwithstanding the pending international proceedings, it is empowered to adjudicate the case. It upheld the ITD’s plea, that the real effect of such share transfer was to transfer the India assets of Cairn UK, which are subject to tax in India. The Tribunal however rejected the Department’s claim of interest of Rs. 18,800 crores, saying that it cannot be charged in the case of a retrospective tax amendment.
While a jubilant ITD claimed victory against the ‘deliberate device’ of Cairn UK to evade Indian taxes, the British company refused to comment on the judgement. Tax experts opine that such retro taxes will discourage foreign investments. The next round of the arbitration proceedings are scheduled in January 2018, with the UK government lobbying for the tax liability to be pardoned under the bilateral tax treaty, which looks unlikely. Till then all Indian assets of Cairn UK lie frozen, as the determined tax department seeks to recover the disputed taxes.