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Income tax department to challenge ITAT relief to Cairn Energy in HC
April, 24th 2017

The Income Tax Department is likely to challenge in high court a tax tribunal order giving relief to British oil firm Cairn Energy plc from payment of interest on a Rs 10,247 crore tax demand it had raised retrospectively.

The department feels its January 2016 final assessment order raising a tax demand of Rs 10,247 crore on alleged capital gain the British firm made when it transferred its India assets to a newly created company Cairn India in 2006, and another Rs 18,800 crore in interest for non-payment for 10 years, is correct.

The Income Tax Appellate Tribunal (ITAT), in its March 9 order, held that Cairn Energy was liable to pay tax on the 2006 transfer of India assets to newly created Cairn India, prior to its listing. It, however, held that interest cannot be charged on it as the demand was raised using retrospective tax legislation.

"We feel interest is due and is liable to be paid. We plan to soon approach the high court seeking quashing of the ITAT order," a senior income tax department official told PTI.

The I-T department is also seeking up to 300 per cent of the principal as penalty for non-payment.

"We have issued a show cause notice to Cairn Energy asking why penalty should not be levied on it. They have sought 10 days to respond to the notice," the official said.

Within weeks of the ITAT ruling, Income Tax Department on March 31 sent a notice to Cairn Energy seeking Rs 10,247 crore principal tax and late payment interest from February 2016 -- one month from the date of original 2016 final assessment order.

"If we get a favourable high court ruling, the interest will be charged from 2006," the official said.

In 2011, Cairn Energy had sold majority stake in Cairn India to mining mogul Anil Agarwal's Vedanta. It had retained a minority 9.8 per cent stake in Cairn India.

Just as it was planning to offload it in the secondary market, the tax department on January 24, 2014 issued draft assessment order alleging it made capital gain in assessment year 2006-07 and attached the residual stake in Cairn India.

While a Cairn Energy spokesperson could not be immediately reached for comments, the company had in a notice to its shareholders earlier this month stated that the decision of the ITAT is "potentially subject to appeal."

The company maintains that no tax was due and what was done was an internal reorganisation before listing of Indian arm.

It is of the opinion that the enforcement of any tax liability deemed due by the tax department will be limited to India assets, which had a value of about USD 750 million as of December 31, 2016.

These assets comprised principally Cairn's residual shareholding in Cairn India.

Cairn has already initiated international arbitration against the tax demand and freeze on Cairn India shares.

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