Global metals and mining giant Vedanta Resources Plc, the parent of petroleum explorer Cairn India, has informed the London Stock Exchange (LSE) it has asked its counsel to file a notice of claim against the Indian government under UK-India Bilateral Investment Treaty (BIT) on a Rs 20,494-crore tax demand from the authorities here.
Cairn India informed the Bombay Stock Exchange (BSE) of the Vedanta's communication today. The company had received an assessment order from the Income Tax Department regarding a decision by the government in 2012 to amend the Indian Income Tax Act 1961 to impose retrospective tax on various prior transactions.
Vedanta holds 59.9% stake in Cairn India. The tax demand is for an alleged failure todeduct withholding tax on alleged capital gains arising during 2006-07 in the hands of Cairn UK Holdings Limited (CUHL), Cairn India's erstwhile parent company, a subsidiary of Cairn Energy Plc.
The demand from Cairn India totals Rs 20,494 crore ($3.293 billion) comprising Rs 10,247 crore of 'tax' and an additional same amount as 'interest'. "If enforced, such tax demand would have serious consequences for Cairn India and therefore Vedanta's investment in Cairn India. Vedanta understands that a parallel tax demand has also been made by the Indian Income Tax Department on Cairn UK Holdings Limited," Vedanta said in its communication to LSE. The notice, served under BIT, is the first step prior to the commencement of international arbitration under the treaty.
"The BIT provides that the government is obliged, amongst other things, to accord fair and equitable treatment to investors and to provide full protection and security to investments," Vedanta said. Vedanta and Cairn India have been advised by leading international counsel that the retrospectivetax legislation passed is a violation of protections accorded to investors under the BIT and constitutes a serious impairment of the treaty rights of Vedanta, the mining giant said, adding it will continue to take all necessary steps to protect their interest and the interest of their shareholders.
The tax demand is in respect of the transaction of Cairn UK Holdings Ltdtransferring the shares of Cairn India Holdings Limited (CIHL) to Cairn Indiaas part of an internal group reorganisation carried out in 2006-07 to facilitate the Initial Public Offer (IPO) of Cairn India. The company had on 13th March 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 financial year 2006-07. Earlier, Cairn Energy had also responded to the tax demand served on it by filing a notice of dispute against the Indian income tax department under the UK-India Investment Treaty.
Post the dispute notice, the two sides would enter a period of negotiation seeking resolution. Cairn Plc has also reportedly sought compensation from the government for the steep fall in the value of its sharesin Cairn India, which it is not allowed to sell until it settles the retrospective tax demand of Rs 10,200 crore.
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