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I-T department restrains Cairn Energy from selling India stake

The tax department has sent out a notice to Cairn Energy under the same retrospective section under which it has questioned the Vodafone share transaction.

New Delhi | Updated: January 25, 2014 3:07 am
 The tax department has sent out a notice to Cairn Energy under the same retrospective section under which it has questioned the Vodafone share transaction. (Photo: PTI)
The tax department has sent out a notice to Cairn Energy under the same retrospective section under which it has questioned the Vodafone share transaction. (Photo: PTI)

The Income Tax Department has instructed UK-based Cairn Energy Plc not to sell its 10.3 per cent stake in Cairn India. Cairn India’s buyback programme had opened on Thursday and Cairn Energy was seen as a likely participant in the programme.

The tax department has sent out a notice to Cairn Energy under the same retrospective section under which it has questioned the Vodafone share transaction. The query under Section 9 of the Income tax Act comes despite finance minister P Chidambaram and his adviser Parthasarathi Shome saying at several fora that the operation of the Section will be held in abeyance.

The department wants to know about the transfer of shares overlaying the Indian assets that were held in a subsidiary set up in Jersey, a tax haven, and were transferred to the newly incorporated Cairn India in 2006.

Cairn Energy had transferred the India assets to Cairn India. The firm subsequently also got listed on the Indian stock exchanges through an initial public offering in 2006. The tax department, according to officials is investigating this asset transfer under the section that was amended with retrospective effect in Budget 2012-13 to capture a situation such as Vodafone’s takeover of the Cayman Islands-based holding company, which had assets based in India.

According to a company statement, “Cairn (Energy) has been contacted by the Income Tax Department to discuss income-tax assessments for the year ending March 31, 2007. Cairn is cooperating to provide the necessary documentation and information as requested.” The Edinburgh-based company also added that while discussions are ongoing, the tax department “has instructed Cairn Energy plc to hold its shares in Cairn India”.

Cairn Energy, which raised Rs 8,616 crore in the IPO, sold its majority stake in Cairn India to mining group Vedanta Group for $8.67 billion in 2011. Cairn India, which is sitting on a cash pile of about $3 billion, plans to buy 17.09 crore shares, or 8.9 per cent of the equity, from the open market at not more than Rs 335 apiece, aggregating up to Rs 5,725 crore.

The tax department had ‘surveyed’ Cairn India’s Gurgaon office on January 15. The probe is under Section 9, which says, “an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.”

Given its retrospective nature, the Section had adversely impacted the investor sentiments in the country. Following the concerns, the government had constituted a committee under Shome to review the amendment. Shome had taken a strong exception to the amendment and had said that while it should be applied in rarest of rare cases, it too should happen only prospectively and not retrospectively.

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