11/03/2015 5:58 PM IST | Updated 15/07/2016 8:25 AM IST

Cairn Energy Files Dispute Case Against Indian Retrospective Tax Claim

INDIA - DECEMBER 18:  View of Cairn energy in Rajasthan, India  (Photo by Purushottam Diwakar/The India Today Group/Getty Images)
The India Today Group via Getty Images
INDIA - DECEMBER 18: View of Cairn energy in Rajasthan, India (Photo by Purushottam Diwakar/The India Today Group/Getty Images)

Edinburgh-based Cairn Energy Plc is now faced with a retrospective tax bill in India despite the government's assurances that an aggressive taxation policy was a thing of the past.

The company has contested the income tax department's claim of Rs 10,247 crore ($1.6 billion) from the company. Today, it filed a formal dispute under the terms of a UK-India Investment Treaty, meaning the Indian government and Cairn will negotiate or otherwise turn to arbitration. The stock of the London-listed company was down 21.9 percent.

The tax demand relates to the listing of its then-Indian operation in 2007. Cairn sold majority stake in its Indian unit in 2011 to Vedanta, the mining company controlled by billionaire Anil Agarwal, for $8.67 billion. It still retains 9.8 percent stake in the company. Cairn India stock was down 3.20 percent in trading today.

The income tax department slapped the notice on Cairn, alleging that the company made Rs 24,500 crore worth of capital gains in 2006 when it incorporated the India business from various subsidiaries around the world into Cairn India and listed it.

This tax demand was made through a widely-criticised law pushed by the last UPA government in 2012 which made it possible to raise tax claims on transactions made in the past.

Apart from filing the dispute, Cairn will also claim "restitution of losses" stemming from the delay in sale of its remaining holding in its Indian unit, because it was caused by the tax department's investigation which began in January 2014. Its outstanding holding is worth about $700 million. "Supported by detailed legal advice, on the strength of the legal protections available to it under international law, Cairn does not intend to make any accounting provision in respect of the draft tax assessment," it said in a statement.

The tax demand comes as a surprise, because Finance Minister Arun Jaitley has repeatedly said that India would avoid retrospective taxation, and move towards a tax-friendly policy to attract more foreign investment. The claim on Cairn Energy flies in the face of it.

"Against a backdrop of regular engagement with the government of India since January 2014 it is very disappointing to have received a draft assessment order at this time," said Cairn Chief Executive Simon Thomson in the statement.

This has become the latest high-profile tax row in the country, after the infamous Vodafone case. Other foreign companies such as Royal Dutch Shell Plc, Microsoft and IBM Corp have also been faced with claims from the tax department.

(With inputs from Reuters)