Wonder why the taxman has demanded ₹20,495 crore from the Vedanta Group- controlled Cairn India? Also, why the company’s former parent, the UK-based Cairn Energy PLC, has been asked to cough up $1.6 billion (₹10,247 crore)?
Both these companies find themselves in the dock over the same case – that of alleged non-payment of taxes when Cairn Energy’s operations in India were restructured in 2006 in the run-up to Cairn India’s initial public offering (IPO) that year.
Here’s the somewhat complicated background to the case.
Before the Cairn India IPO, the India operations of Cairn Energy were owned by a company called Cairn India Holdings, registered in the Channel Islands, and its subsidiaries.
Cairn India Holdings was a fully owned subsidiary of Cairn UK Holdings, in turn a fully owned subsidiary of Cairn Energy.
At the time of the IPO, the ownership of the India assets was transferred from Cairn UK Holdings to a new company – Cairn India.
Incorporated in August 2006, Cairn India acquired 100 per cent of the share capital of Cairn India Holdings from Cairn UK Holdings in a phased manner from August to December 2006.
For parting with the India assets, Cairn UK Holdings was compensated by allotment of shares in Cairn India.
In effect, after the IPO: a) Cairn India owned Cairn India Holdings and its subsidiaries, and thereby the Indian operations b) Cairn Energy, through, Cairn UK Holdings held a 69 per cent stake in Cairn India.
The Income-Tax department claims that the value received by Cairn UK Holdings from the shares allotted to it in Cairn India was worth ₹26,681.87 crore.
This is based on the asset value of the Barmer, Ravva and Cambay fields.
But the entire investment by the company in the India business, the taxman says, was just ₹2,178.36 crore.
Ergo: capital gains of ₹24,503.51 crore were made.
But no tax on that was paid.
At about 42 per cent, the tax due works out to ₹10,247 crore.
Cairn UK Holdings was supposed to pay it, and since it didn’t, it has been slapped with a demand notice.
In 2011, Cairn Energy sold the majority stake in Cairn India to the Vedanta Group.
About 10 per cent stake remains with Cairn Energy which has been seeking to sell it, but has been prevented by the tax authorities until the dispute is sorted out.
Cairn India has also been hauled over the coals, because according to the IT department, the company should have withheld the tax due at the time of issue of the shares to Cairn UK Holdings.
So, Cairn India has been asked to make good ₹20,495 crore – comprising tax of ₹10,248 crore and interest of ₹10,247 crore.