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By Siri Bulusu
Indian tax authorities have initiated a $4.75 billion penalty charge against Cairn Energy for failing to pay a capital gains tax demand of $1.58 billion on a 2006 transaction.
Under Section 271(1)(c) of the Income Tax Act, Indian tax authorities can levy a maximum 200 percent penalty against transactions after April 1, 2016, but since the Cairn transaction in question occurred in 2006, the penalty is chargeable up to 300 percent, which was the maximum penalty by law in that year.
With the penalty initiated, Cairn Energy has a chance to respond to the tax officer before the case is taken up by India’s lower tax tribunals.
“The government can still collect on the penalty even if it loses ground on the principal capital gains tax demand,” Uday Ved, a Mumbai-based chartered accountant, told Bloomberg BNA April 21, adding that this is an effort by the government to “keep the case alive.”
In a March 9 order, India’s lower tax tribunal upheld a capital gains tax charge of 102.6 billion rupees ($1.58 billion) on Cairn Energy and dropped a 188 billion rupee ($2.86 billion) interest charge.
Then on April 9, the government made a fresh interest demand for $1.6 billion due on the principal demand, from the date of the 2014 draft assessment.
Ved said the government will demand the penalty on the grounds the taxpayer has “concealed particulars of his income or furnished inaccurate particulars of income”—two conditions that satisfy Section 271(1)(c) of the Income Tax Act.
“The government will take the view that the income was concealed when the original transaction occurred and claim the penalty is applicable to Cairn,” Ved said.
Ved added that the government is handling the Cairn Energy case the same way it handled its dispute with Vodafone Group Plc, and that one case can be resolved without setting a precedent.
The capital gains tax applied to Cairn Energy in this case is widely known as the “Vodafone tax,” due to the ongoing dispute between the government and the telecommunications giant.
A retrospective 2012 amendment to India’s Income Tax Act came after India’s top court ruled that a 2007 offshore restructuring of assets between Vodafone Group and India-based telecommunications company Hutchinson Essar Ltd. wasn’t taxable. Following the ruling, the Indian government amended its tax law to include offshore transfers of Indian shares under India’s tax jurisdiction, and slapped Vodafone Group with a $2 billion tax demand due to the provision’s retrospective applicability.
The Income Tax Department applied the same 2012 tax law amendment to Cairn Energy in 2014 when it issued a tax assessment of 102.6 billion rupees ($1.58 billion), claiming Cairn incurred 245.03 billion rupees ($3.7 billion) in capital gains from an internal corporate restructuring.
Cairn has asked the international panel overseeing the arbitration to withdraw India’s tax demand on the grounds that it violates the U.K.-India Investment Treaty, which aims to protect U.K. companies doing business in India.
“This is a natural penalty consistent with what is within legal bounds for the government,” T.P. Ostwal, managing partner of T.P Ostwal & Associates LLP, told Bloomberg BNA April 21.
Ostwal said the penalty was initiated within the permissible time after the assessment order, and it remains to be seen how Cairn will respond.
Cairn Energy didn’t respond to Bloomberg BNA’s March 21 emailed request for comment.
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