The government has decided to join the arbitration initiated by Britain-based Cairn Energy in the matter of a Rs.10,247 crore ($1.6 billion) retrospective demand raised by India’s income tax department, a finance ministry source said here on Wednesday.
The source told IANS that the government will appoint an arbitrator soon and the same has been conveyed to the company.
This follows Cairns filing an arbitration notice with the International Court of Justice at Hague (Holland) seeking appointment of an arbitrator on behalf of the Indian government, citing breach of bilateral treaty obligations on protection of investment.
Cairn maintains the tax in question is a breach by retroactively applying a newly enacted capital gains tax law to an internal corporate reorganisation undertaken in 2006.
The source said India’s appointment of an arbitrator would be without prejudice to the government’s stand that the tax dispute does not fall within the scope of the India-UK Bilateral Investment Protection Agreement.
Cairn Energy, which in 2011 sold majority stake in Cairn India to mining major Vedanta Resources, has said it had to scale back on investments as it was barred by the Income Tax Department from selling its residual 9.8 percent stake.
The demand relates to alleged Rs.24,500 crore capital gains it made in 2006 when it transferred all its India assets to a new company, Cairn India, which got listed on the stock exchanges.
“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,” Cairn had said in a statement on receipt of the tax demand in March.
In April, Cairn India moved the Delhi High Court seeking quashing of income tax department’s demand order to pay Rs.20,495 crore tax. The demand comprises Rs.10,248 crore tax and Rs.10,247 crore interest.
Cairn India, part of the Anil Agarwal-controlled Vedanta group, moved the court against income tax department’s order asking it to pay the tax and a direction to tax authorities to take no coercive steps for recovery of demand.
Cairn India said the tax proceedings should be quashed as these were initiated after a lapse of more than six years from the end of 2006-07.
The plea said the courts have held that proceedings should be initiated within a reasonable period of four years.