I-T dept slaps Rs 20,495 crore tax demand on Cairn India

This is the second case after Vodafone where a tax liability of this magnitude has been raised by the department by application of retrospective amendments carried out in the  in 2012. Vodafone is facing a tax liability of Rs 20,000 crore for its alleged failure to withhold tax on capital gains made when it acquired Hutchison Whampoa’s stake in its Indian telecom business in 2007. Shares of Cairn India fell 3.2 per cent on the BSE to close at Rs 226.36.

The tax department’s demand includes tax of Rs 10,248 crore and interest of Rs 10,247 crore. The department had, earlier this week, sent a draft assessment order to Cairn UK Holdings Ltd, raising tax demand of Rs 10,248 crore for selling its stakes in Jersey-based Cairn India Holdings to Cairn India Ltd as a part of internal group reorganisation in 2006-07 before its listing in 2007.

Given the fact that the tax liability falls on a non-resident company over which the tax department has no jurisdiction, the department is of the view that Cairn India is in default for not deducting the tax at source while making payment to the UK firm. The investigation was launched by the tax department on January 15, 2014, to determine if capital gains tax was due from Cairn Energy’s transfer of shares of Indian assets to Cairn India in 2006.

In a January 22 order this year, the department held that the Edinburgh-based firm made capital gains of Rs 24,503.50 crore in the transfer. Cairn India acquired the assets for Rs 26,681.87 crore against its investment of Rs 2,178.36 crore in the India business.

After transferring the assets, the British energy giant listed Cairn India on the stock exchanges through an IPO in 2006 that raised Rs 8,616 crore. Cairn Energy sold majority stake of Indian unit to Vedanta for $8.67 billion in 2011.