Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.
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.
To contact the reporter on this story: Siri Bulusu in New Delhi at firstname.lastname@example.org
To contact the editor responsible for this story: Penny Sukhraj at email@example.com
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)