The income-tax department has sold part of Cairn Energy’s shareholding worth $ 216 million (around Rs 1,500 crore) in Vedanta Ltd (VL) to recover portion of the Rs 10,200 crore retrospective tax it had raised against the British firm.
“Cairn has now been notified by the I-T Department that it has sold part of Cairn’s shareholding in VL, realising and seizing proceeds of $216 million. Following this sale, Cairn’s retained holding in VL is now approximately three per cent. It is possible that the IITD may make further sales,” Cairn said in a statement.
According to Cairn, the I-T Department has continued to enforce its retrospective tax claim against Cairn whilst the Treaty arbitration has been ongoing. “To date the I-T Department has seized dividends due to Cairn from its shareholding in Vedanta totalling approximately $155 million and it has offset a tax rebate of $234 million due to Cairn as a result of overpayment of capital gains tax on a separate matter,” Cairn said.
It said all of these enforcement measures by the I-T Department are addressed in Cairn’s claim in the arbitration. The reparation sought by Cairn in the arbitration is the monetary value required to restore Cairn to the position it would have enjoyed in 2014 but for the Government of India’s actions in breach of the Treaty. “Accordingly, the status of Cairn’s assets seized in India does not affect the merits of Cairn’s claims, the amount of relief sought, or the enforceability of the arbitral award,” Cairn said.
After the disposal of part of this shareholding in Vedanta and seizure of proceeds by the I-T Department, Cairn will write down the carrying value of its investment in Vedanta which will result in an impairment charge at the half year equal to the value of the total shares notified as having been sold by the I-T Dept at that time, Cairn said.
“Cairn continues to have a high level of confidence in the merits of its claims in the arbitration. Cairn is seeking full restitution for losses totalling approximately $1.3 billion resulting from India’s expropriation of its investments in India in 2014, and India’s unfair and inequitable treatment of those investments, due to the imposition of retrospective tax measures,” it said.
The merger of Cairn India Limited (CIL) with VL completed in April 2017. Under the terms of the merger, Cairn received ordinary shares and preference shares in Vedanta in exchange for the residual shareholding of 10 per cent in CIL. As a result, Cairn had a shareholding of 5 per cent in Vedanta plus an interest in preference shares. This investment was valued at $1.1 billion as of December 2017.
In January 2014, Cairn UK Holdings Limited, a direct subsidiary of Cairn, received notification from the I-T Department that it was restricted from selling its shareholding of approximately 10 per cent in CIL, which at that time had a market value of approximately $1 bn. “In that notification, the I-T Department claimed to have identified unassessed taxable income resulting from certain intra-group share transfers undertaken in 2006, such transactions having been undertaken in order to facilitate the IPO of CIL in 2007. The notification made reference to retrospective Indian tax legislation enacted in 2012, which the I-T was seeking to apply to the 2006 transactions,” Cairn said.
The assessment by the I-T Department of principal tax due on the 2006 transactions is Rs 10,200 crore ($1.6 billion), plus applicable interest and penalties. Interest is currently being charged on the principal at a rate of 12 per cent per annum from February 2016, although this is subject to the I-T Department’s Indian court appeal that interest should be back-dated to 2007, it said. Penalties are currently assessed as 100 per cent of the principal tax due, although this is subject to appeal by CUHL that penalties should not be charged given the retrospective nature of the tax levied.