Cairn India slapped with Rs 20,495 crore tax demand

NEW DELHI: Income tax authorities issued a tax demand of Rs 20,495 crore on Cairn India for failing to deduct withholding tax on alleged capital gains made by its former parent Cairn UK Holdings.

Cairn India on Friday said it will pursue all possible options to protect its interest. The tax authorities have demanded Cairn India pay about Rs 20,495 crore, which includes tax and interest of Rs 10,247 crore. Cairn India’s shares fell 3.5% on Friday to Rs 225.70.

“Cairn India Limited does not agree with this alleged demand and will pursue all possible options to protect its interest,” the company said in statement to the stock exchanges. The tax demand relates to a transaction carried out by Cairn UK Holdings Ltd (CUHL), a subsidiary of Cairn Energy Plc, “transferring the shares of Cairn India Holdings Ltd to Cairn India Ltd as part of internal group re-organisation in 2006-07 to facilitate the IPO of Cairn India Limited,” it said. The department has already slapped a tax demand on Cairn Energy Plc seeking a bite of an Rs 24,500 crore worth of capital gains it supposedly made in 2006 on this transaction.

The company said it has “always been fully compliant” with all Indian Income tax laws and income tax assessments including transfer pricing assessment were duly completed for 2006-07, earlier.

The demand on Cairn India follows an order to Cairn UK Holdings earlier in the week. Cairn Energy, which had in 2011 sold majority stake in its Indian unit to mining group Vedanta for $ 8.67 billion, still holds a 9.8 % stake in Cairn India. The government has also provisionally attached CUHL’s remaining stake in Cairn India Ltd.

Cairn Energy is filing a notice of dispute under the UK-India Investment Treaty to protect its legal position.

The tax demand notice to Cairn India is similar to the one issued to Vodafone for not withholding tax on payments made to Hong Kong-based Hutchison Whampoa for buying out Hutchison Essar’s operations here. The notice was challenged by Vodafone and it subsequently won the case in Supreme Court prompting the government of the day to amend the income tax retrospectively from 1961 to tax indirect transfer of Indian companies.