Before the Cairn India IPO, the India operations of Cairn Energy were owned by a company called Cairn India Holdings-Cayman Island and its subsidiaries. Cairn India Holdings was a 100% subsidiary of Cairn UK Holdings, which was a 100% 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. In 2006 Cairn India acquired 100% share capital of Cairn India Holdings from Cairn UK Holdings in exchange of 69% shares in Cairn India were issued to Cairn UK Holdings. Hence, Cairn Energy, through Cairn UK Holdings held a 69% stake in Cairn India.
Indirect transfer is a transaction wherein the foreign company’s shares being sold derives, directly or indirectly, its value substantially from assets located in India. In the instant case Cairn Energy transferred its foreign subsidiaries to Cairn India and the foreign subsidiaries derived their value from assets located in India. As per the provisions of section 9(1)(i) [as amended by Finance Act 2012], a capital asset being any share in a company incorporated outside India shall be deemed to have been situated in India, if the share derives, directly or indirectly, its value substantially from the assets located in India. Hence in the instant case of Cairn Energy, the transfer of foreign subsidiaries qualified as indirect transfer, liable to tax in India as per the amended provisions of section 9(1)(i) of the Act.
My Take
Cairn’s capital gain tax liability has been confirmed by Indian Income tax appellate Tribunal (‘ITAT’). Disregarding the pending arbitration, the revenue authorities stuck to their contention that tax disputes are outside the purview of BIPA. ITAT observed that keeping the issue unnecessarily pending won’t be proper since there is no timeline available about the disposal of the application of the assessee for arbitration proceedings and also that ITAT’s ruling once passed can very well be applied to the arbitration proceedings.
ITAT rejected Cairn’s contention that they have note earned any real income, by observing that there was an increase in the wealth of Cairn owing to the IPO and value derived by book building process. ITAT confirmed the order of the assessing officer in working out capital Gain on sale of shares of Cairn India Holding limited in the hands of appellant of Rs. 24,503.5 crores, levying tax of Rs. 10,000 crores.
Cairn’s liability arose owing to the retrospective amendement in the provisions of section 9(1)(i) of the Act taxing the indirect transfer transactions. The current tax demand raised on Cairn India is likely to be viewed adversely by the foreign investors and it may dampen the euphoria of buoyancy of foreign investors doing business in India. Though the government has clearly stated the end of retrospective tax regime and following a non adversarial tax approach, this tax demand is not likely to go down well with the foreign investors.
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