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Cairn to sue taxman for damages over India's retrospective $1.6bn tax demand

Britain-based Cairn Energy on Tuesday said it would contest a Rs 10,247 crore ($1.6 billion) retrospective demand raised by India’s income tax department and it would seek damages for losses resulting from the department’s attachment of its stake in Cairn India.

“Cairn is currently unable to access the value of its 10 percent residual shareholding in Cairn India Limited (CIL) valued at $526 million on 30 June 2015, having received a draft assessment order Q1 2015 relating to an internal group reorganisation completed in 2006,” the Scottish oil major said in its half-yearly report.

“Cairn strongly contests the basis of the draft assessment order and has commenced international arbitration proceedings with the Government of India under the UK-India Investment Treaty,” the statement said.

“In addition, Cairn will also seek restitution of losses resulting from the attachment of its CIL (Cairn India) stake since 2014,” it added.

Cairn said it has appointed an arbitrator and awaits the Indian government’s naming its appointment to the arbitration panel.

Cairn Energy, which in 2011 sold majority stake in Cairn India to mining major Vedanta Resources, has said it had to scale back on investments as it was barred by the Income Tax Department from selling its residual 9.8 percent stake.

The demand relates to alleged Rs.24,500 crore capital gains it made in 2006 when it transferred all its India assets to a new company, Cairn India, which got listed on the stock exchanges.

“Correspondence received from the Income Tax Department indicates that the assessment stems from amendments introduced in the 2012 Finance Act which seek to tax prior year transactions under retrospective legislation,” Cairn had said in a statement on receipt of the tax demand in March.

In April, Cairn India moved Delhi high court seeking quashing of income tax department’s demand order to pay Rs.20,495 crore tax. The demand comprises Rs.10,248 crore tax and Rs.10,247 crore interest.

Cairn India, part of the Anil Agarwal-controlled Vedanta group, moved the court against income tax department’s order asking it to pay the tax and a direction to tax authorities to take no coercive steps for recovery of demand.

Cairn India said the tax proceedings should be quashed as these were initiated after a lapse of more than six years from the end of 2006-07. The plea said the courts have held that proceedings should be initiated within a reasonable period of four years.

It said that it cannot be penalised because it could not have withheld tax anticipating a retrospective amendment.

“There was no taxable gain and, accordingly, no liability to withhold tax on the date of payment,” it said.

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