Facing a potential tax demand on alleged capital gains of ₹24,500 crore it made 7 years back, Cairn Energy plc has been slapped with two more notices which the Scottish explorer plans to counter vehemently.

Cairn faces a potential tax demand on an alleged ₹24,500 crore of capital gains it made when in 2006-07 it transferred all its India assets to a new company, Cairn India.

It said none of the transactions undertaken by it during that fiscal were chargeable to tax in India.

Its wholly owned subsidiary, Cairn UK Holdings Ltd “filed a nil return for the year in question on the grounds that none of the transactions undertaken by it during that fiscal year is chargeable to tax in India,” the company said in a statement.

In addition, Cairn has received two further notices from the Indian Income Tax Department.

“The first, dated March 29, 2014, is a request made to Cairn Energy plc to file a tax return for the fiscal year ended 31 March 2007. Cairn intends to file a nil return for this notice.

“The second, dated March 31, 2014, claims that CUHL should have withheld tax on dividends paid to its parent company, Cairn Energy plc,” it said.

Stating that no tax demand has been raised, Cairn said it “intends to respond to the notice refuting this claim”.

“Throughout its history of operating in India Cairn has been compliant with the tax legislation in force in each year.

Cairn has stated that it intends to take whatever steps are necessary to protect the company’s interests,” the statement said.

Residual share of Cairn Energy

The I-T Department has restrained Cairn from selling its residual 10.3 per cent stake, worth over $1 billion, in Cairn India till the tax dispute is resolved.

Cairn Energy had in 2011 sold majority stake in its Indian unit, Cairn India to mining group Vedanta for $8.67 billion. It still holds 10.3 per cent stake in Cairn India.

The I-T Department had in a January 22 order held that the Edinburgh-based firm made capital gains of ₹24,503.50 crore when it transferred its entire India business from subsidiaries incorporated in places like Jersey, a tax haven, to the newly incorporated Cairn India in 2006.

It, according to the department, received ₹26,681.87 crore for the asset transfer against its entire investment of ₹2,178.36 crore in the India business.

After transferring the assets, the Scottish explorer listed Cairn India on the stock exchanges through an initial public offering (IPO) in 2006 that raised ₹8,616 crore.

While the I-T Department has so far not raised a tax demand on Cairn Energy, it has ordered Cairn India not to allow the transfer of UK firm’s residual stake. It also ordered that the shares cannot be pledged or mortgaged.

Cairn Energy was widely seen as a likely participant in the Indian firm’s share buyback, which opened on January 23.

Cairn India plans to buy 17.09 crore shares, or 8.9 per cent of the equity, from the open market at not more than ₹335 apiece, aggregating up to ₹5,725 crore.

The I-T Department started an investigation on January 15 to determine if capital gains tax was due from Cairn Energy’s transfer of shares of Indian assets to Cairn India in 2006.