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CAIRN India Taxation Issue

PRESENTED BY: AALAP PANDYA (20135001)


MRUGANDA SHAH (20135038)
SWASTI BHATIA
(20135056)

Introduction
Around eight years ago ,Edinburgh-basedCairn Energycreated a new companyCairn Indiaand
transferred all of its India assets to it.
Cairn India was incorporated in 2006 as a subsidiary of UK based Cairn Energy PLC.
It mainly focusses on acquired Oil & Gas Exploration business.
After transferring the assets, the company listed Cairn India on the stock exchanges through an
Initial Public Offer (IPO) in 2007.

According to Cairn, the transfer of assets was part of a reorganization exercise aimed at
enabling theIPOin 2007.

In 2011, Cairn Energy sold majority stake in its Indian arm to mining giant Vedanta for $8.67
billion and still holds 10 per cent stake in Cairn India.

Summary Cairn Indias Taxation Issue


The IncomeTaxDepartment in India has slapped a $1.6 billion tax demand on British petroleum
explorer, Cairn Energy.
It all started eight years ago when Edinburgh-basedCairn Energycreated a new companyCairn
Indiain 2006 and transferred all of its India assets to it.
After transferring the assets, the company listed Cairn India on the stock exchanges through an
Initial Public Offer (IPO).
According to Cairn, the transfer of assets was part of a reorganization exercise aimed at enabling
theIPOin 2007.
In January 2014, the tax department contacted Cairn Energy to audit its finances and weigh tax
assessments for the financial year 2006-07.
The company was also ordered not to sell its 10 per cent holding in Cairn India which was then

Summary Cairn Indias Taxation Issue


the I-T Department had so far not raised a tax demand on Cairn Energy, it had ordered Cairn India
not to allow the transfer of UK firm's residual 10 per cent stake.
The tax authorities slapped the $1.6 billion (Rs 10,247 Crore) claim stating the firm allegedly
made capital gains of Rs 24,503.50 Crorewhen it transferred its India business to the newly
incorporated Cairn India in 2006.
Tax authorities are also understood to have stated Cairn Energy received Rs 26,681.87 crore for
the asset transfer against its entire investment of Rs 2,178.36 crore in the India business.
The company has responded to the disappointing tax claim by filing a notice of dispute under
the UK-India Investment Treaty and the two sides are now headed for a round of negotiations
failing which an international arbitration panel will be constituted to adjudicate on the matter

Capital Gains
The Retroactive Amendment, and the imposition of capital gains tax, is not only contrary to relevant legal
standards, its application to Cairn is particularly unjust because the transactions at issue were internal to the
Cairn Group;
no shares or assets were sold to any third party nor were any capital gains earned," it said in the
communication to the government.
Had Cairn received any indication or had any reasonable cause to believe that its purely internal
transaction would be subject to capital gains tax in India, it would not have undertaken the
internal reorganisation," it said

Cont
Indirect transfer is a transaction wherein the foreign companys shares being sold derives, directly or
indirectly, its value substantially from assets located in India.
In this case, Cairn Energy transferred its foreign subsidiary to Cairn India and the foreign subsidiary
derived its value from assets located in India. As per the provisions of section 9(1)(i) (as amended by
Finance Act 2012),
a capital asset being any share in a company incorporated outside India shall be deemed to have been
situated in India, if the share derives, directly or indirectly, its value substantially from the assets located
in India.
So the transfer of foreign subsidiaries qualified as indirect transfer is liable to tax in India as per the
amended provisions of section 9(1)(i) of the Act.

Viewpoint of Cairn Indias CEO


Cairn Energy CEO,Simon Thomsonhas said the company has consistently confirmed it has been
fully compliant with all relevant legislation and paid all applicable taxes in India and Cairn Energy is
confident of its position under the UK-India investment treaty.
Thomson also said the current issue is confined to Cairn Energys interests in India and the group
remains well funded to deliver all of its objectives and commitments and looks forward to moving
with its strategy while this issue is resolved under legal process.
The company said the actions of tax authorities breach parts of its obligations under the UK-India
Investment Treaty. These include obligation under Article 3 to "create favourable conditions", and
ensure "fair and equitable treatment" and "full protection and security". It also cited Article 5 and
Article 7, which the company feels should insulate it from retrospective taxes and restrictions on
selling shares.
The company's chief executive Simon Thomson sent a "notice of dispute" under Article 9 of the
treaty on March 11. It was addressed to Prime Minister Narendra Modi, Finance MinisterArun
Jaitley, Law Minister Ravi Shankar Prasadand External Affairs MinisterSushma Swaraj.

Viewpoint of FM Arun Jaitely


Finance minister Arun Jaitley has said that the Narendra Modi-led NDA government would not
move on retrospective taxation, and would let previous tax notices and what he called 'legacy
issues' from the earlier government be sorted through India's judicial system.

Conclusion