Scottish oil explorer Cairn Energy today said it is engaged with the Indian government to resolve a tax dispute that has stalled sale of its 10% stake in Cairn India Ltd and led to 40% job cuts.
"We note the comments made by the new BJP Government about the impact of retrospective tax legislation and the negative signal it sends to the international investment community," Cairn Chairman Ian Tyler said in the 2014 earnings statement.
"Our approach to date has been to focus on engagement with the Government of India and resolving this matter clearly continues to be a high priority," he said.
The company faces a potential tax demand on an alleged Rs 24,500 crore of capital gains it made when in 2006 it transferred all its India assets to a new company, Cairn India and got it listed on stock exchanges.
No tax demand has been raised so far, but it has been barred from selling its residual stake in Cairn India. Cairn Energy, which had in 2011 sold majority stake in its Indian unit to mining group Vedanta for $8.67 billion, still holds 9.8% stake in Cairn India.
The value of that stake has gone down from about $1 billion in January 2014 to around $703 million at the end of the year, the statement said.
"In early 2014, Cairn received notice from the Income Tax Department of India citing 2012 retrospective legislation and requesting information relating to a group reorganisation in 2006," Cairn Chief Executive Simon Thomson said.
"At the same time, the Income Tax Department restricted Cairn from accessing the value of its remaining about 10% shareholding in Cairn India Limited (CIL), then valued at around $1 billion," he added.
The freeze on selling CIL stake forced Cairn to borrow to finance its North Sea development project and to re-organise business by right-sizing the company.
Thomson said: "The priority was to retain and protect the core technical, commercial and financial competencies which form the foundation of Cairn whilst outsourcing non-core capabilities and reducing costs. The resulting new organisational structure was completed in early 2015 with a 40 per cent reduction in the number of employees and contractors in the business."
The Income-Tax Department had in a January 22 order held that the Edinburgh-based firm made capital gains of Rs 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.
According to the I-T Department, it received Rs 26,681.87 crore for the asset transfer against its entire investment of Rs 2,178.36 crore in the India business.
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.
After transferring the assets, the Scottish explorer listed Cairn India on the stock exchanges through an initial public offering (IPO) in 2006 that raised Rs 8,616 crore.
In 2011, Cairn Energy sold its majority stake in Cairn India to Vedanta but continues to hold 9.8% shares.
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.
