Cairn Energy confirmed Tuesday it has instructed counsel to file a Notice of Dispute under the UK-India Investment Treaty in order to protect its legal position and shareholder interests having today received a draft assessment order from the Indian Income Tax Department.
The draft order addressed to Cairn's subsidiary, Cairn UK Holdings Limited, is in respect of fiscal year 2006/7 to the amount of $1.6 billion plus any applicable interest and penalties.
Correspondence received from the Income Tax Department indicates that the assessment stems from amendments introduced in the 2012 Finance Act which seek to tax prior year transactions under retrospective legislation. The transactions subject to the assessment are those undertaken to effect the group reorganization that was required to enable the Initial Public Offering of Cairn India Limited (CIL) in 2007.
Since the original contact from the Income Tax Department in January 2014, Cairn has continued to confirm with its advisers that throughout its history of operating in India, the Company has been fully compliant with the tax legislation in force in each year and paid all applicable taxes.
Cairn strongly contests the basis of the draft assessment and the Notice of Dispute is supported by detailed legal advice on the strength of the legal protections available to it under international law. Under the terms of the UK-India Investment Treaty, the Government of India and Cairn are now required to enter a period of negotiations to seek a resolution to the dispute. To the extent that a satisfactory resolution is not reached during that period, an international arbitration panel will be constituted to adjudicate on the matter.
Cairn continues to be restricted by the Indian Income Tax Department from selling its 10 percent shareholding in CIL, currently valued at approximately $700million. 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. In addition, Cairn will seek restitution of losses resulting from the attachment of its CIL stake since 2014.
Simon Thomson, chief executive, Cairn Energy PLC said:
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