The Telegraph
Saturday , January 25 , 2014
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Tax spanner in Cairn selloff

New Delhi, Jan. 24: The income tax department, probing Cairn Energy’s transfer of Indian assets, has asked the British company not to take any steps to sell a part of its 10.3 per cent stake in Cairn India. The department feels it can gouge out capital gains tax from a deal struck in 2006 when Cairn Energy transferred the shares of its Indian arm to Cairn India, a company registered in the tax haven of Jersey, for about $5.7 billion.

Later, in December 2011, Cairn India sold a 58.5 per cent stake to Vedanta Group for $8.67 billion. The tax department started an investigation on January 15 and has now asked Cairn Energy to stop selling its stake in Cairn India.

I-T officials said the probe at Cairn India’s Gurgaon office last week was undertaken to examine the deal from the perspective of Section 9 of the income tax act, which says any income, earned directly or indirectly from any business in India, or sale or transfer of capital assets in India, will attract capital gains tax.

“Cairn has been contacted by the income tax department of India to discuss income tax assessments for the year ended March 31, 2007. Cairn is co-operating to provide the necessary documentation and information as requested,” the British energy company said in a statement.

“While discussions are ongoing, the income tax department has instructed Cairn Energy Plc to hold its shares in Cairn India,” it said.

Sources said the tax department felt it had a case and would move to seek the tax, which could run into over $800 million.

Vedanta-run Cairn India Ltd plans to spend up to Rs 5,725 crore to buy back shares to give it greater control.

Cairn India, which earlier received shareholders’ approval to buy 17.09 crore shares, or 8.9 per cent of the equity, from the open market at not more than Rs 335 apiece, will buy back the shares from January 23.

The purchase could have included part of the 10.3 per cent stake held by former promoter Cairn Energy. Tax officials say they feel if they can prove a claim against Cairn Energy, they need to do so before the British company exits India.

Cairn Energy will be the second major British company to feel the tax department’s heat after Vodafone.