British oil firm Cairn Energy Plc has accused a senior Finance Ministry official of “privately” advising billionaire Anil Agarwal-led Vedanta Group to withhold its dividend income for a potential squaring off of a retrospective tax liability.
Cairn Energy, which is the only company whose assets have been frozen for a retrospective tax demand, has in a written application to an international arbitration tribunal, stated that its dividend income from its erstwhile subsidiary Cairn India (now a Vedanta Group firm) has not been paid for the last three financial years.
This, it alleged, was done at the behest of the “advise” a senior Finance Ministry official gave to Vedanta in “private meetings”, according to multiple sources in the tax department and industry. It has also written to SEBI on the issue.
The Income-Tax Department had in a January 2014 draft assessment estimated ₹10,247 crore tax due on Cairn Energy for capital gains it allegedly made on a 2006 transfer of India assets to a newly created subsidiary, Cairn India, and then listing it on stock exchanges.
Cairn Energy sold a majority stake in Cairn India to Vedanta Group in 2011 but retained a 9.8 per cent stake, which the tax department has barred it from selling.
After sending the draft assessment order, the tax department had in April 2014 also raised a similar tax demand on Cairn India for not withholding tax in 2006.
Cairn Energy and Cairn India have initiated separate international arbitrations contesting the tax demands.
Though dividend income can be frozen only after a formal tax demand is raised, which happened only on March 31, 2017, after full assessment was completed and June 15, 2017, was given as the due date for payment, Cairn has not received ₹670 crore of dividend income for three fiscal years.
Steering clear
The Finance Ministry said it does not comment on individual cases. Sources, however, said the tax department will reply to the arbitration panel saying it does not interfere in matters between two companies. A Cairn India spokesperson said: “The dividends due to Cairn Energy Plc for the last three years are lying in an unpaid dividend account as they were subject to an attachment order under Section 281B (Income tax Act).
He further said: “Cairn Energy Plc has also been in touch with us and we have been responding to their mails/letters sharing our predicament in view of the notice now issued to them post the order of the Income Tax Tribunal for payment of tax liability by June 15, 2017.”
A Cairn Energy Plc spokesperson confirmed the company has written to “SEBI and Cairn India in relation to payment of Cairn India dividends.” (Separately, a Cairn Energy spokesperson told BusinessLine that at no time has any accusation been made about the conduct of officials in the Finance Ministry)
‘No role to play’
Originally, Cairn Energy approached the arbitration panel in February, saying India is stopping Cairn India from paying dividend.
The tribunal asked the tax department if it had stopped Cairn India from paying dividend. The tax department, in its reply, stated that the matter was between the two companies and it had no role to play, sources said. When replying to that notice, the tax department had internally observed that there can be no attachment of the dividend unless a formal tax demand is raised and tax is not paid.
Sources said based on the tax department statement, the Tribunal gave its verdict that it would not intervene.
This led to Cairn Energy on March 8 issuing a press statement saying the tax department has agreed to lift the freeze on dividend payment by Cairn India, but that it would continue to be restrained from selling the residual stake pending resolution of the tax dispute.
But the dividends never flowed to the company.