Within weeks of the tax tribunal upholding the levy of a retrospective tax, the Income Tax department has sent a fresh notice to UK-based oil explorer Cairn Energy, seeking up to ₹30,700 crore in penalties for not paying its original tax demand of ₹10,247 crore.
The tax demand arises from short-term capital gains that the I-T department says Cairn Energy made after an internal share sale dating back more than 10 years, when Cairn India acquired the local assets of Cairn UK Holdings, giving the UK firm a 69 per cent equity holding in return.
While the I-T department said the value of this indirect transfer of shares was based on local assets, including highly productive oilfields in Rajasthan and the Krishna-Godavari basin, the UK company asserted that it was an internal re-grouping and hence not subject to Indian taxes.
While there was no tax demand made at the time of the re-grouping, the I-T department sent the first notice to the company after an amendment with retrospective effect was made to the Finance Act, 2012. The notice also demanded back-dated interest of ₹18,800 crore on the original tax demand of ₹10,247 crore, taking the total to ₹29,047 crore.
In a ruling last March, however, the Income Tax Appellate Tribunal rejected the tax department’s demand for back-dated interest and asked Cairn Energy to only pony up the tax liability. The fresh penalty imposed by the tax department is higher than its original demand of ₹29,047 crore.
The tax department said it sent a show cause notice to Cairn Energy asking why tax (of ₹10,247 crore) has not yet been paid. The final penalty (totalling ₹30,700 crore) has been levied for the company’s failure to pay the tax on time, taking the total due to ₹40,947 crore.
Company unlikely to pay Cairn Energy’s spokesperson was not immediately available for comment. However, industry insiders indicate the UK-based company is unlikely to pay the tax or the penalty amounts.
The company has maintained in the past that at the time of the restructuring in 2006, no regulatory body ever suggested that the move would trigger a tax liability.
The tax dispute between the Indian government and Cairn has also been the subject of international arbitration since 2014.