Vedanta files arbitration notice over retrospective tax demand

Mining major Vedanta Resources Plc has slapped a Notice of Claims against the Indian government challenging the Rs20,497-crore tax demand on its subsidiary Cairn India Ltd using retrospective legislation.

The notice is the first step required before seeking international arbitration under the UK-India bilateral investment treaty, Vedanta said on Friday.

Anil Agarwal's Vedanta is listed in London, but has most of its operations in India through various subsidies.

Cairn Energy Plc, which sold its stake in Cairn India to Vedanta in 2011, has also filed a notice of dispute under the treaty this week after receiving a tax demand of more than $1.6 billion (over Rs10,000 crore).

Cairn India received the retrospective tax demand in relation to its 2007 listing in India.

The tax demands and lawsuits come at a time the Narendra Modi government claims it is seeking to reduce tax-related litigation and boost much-needed foreign investment.

The Vedanta Group has filed its notice against the Income-Tax Department's imposition of Rs20,497 crore in taxes and penalties on Cairn India for allegedly failing to deduct tax on capital gains made by its former parent Cairn Energy while doing a business reorganisation seven years back.

Cairn Energy had in 2006-07 transfered its India assets including the giant Rajasthan oil fields to a new company, Cairn India, and got it listed on stock exchanges. It sold major shareholding in Cairn India to Vedanta in 2011.

"Vedanta's Board of Directors has instructed counsel to file a notice of claim against the GoI under the UK-India bilateral investment treaty (BIT) in order to protect its legal position and shareholder interests," Vedanta said in a filing to the London Stock Exchange.

"If enforced, such tax demand would have serious consequences for Cairn India and therefore Vedanta's investment in Cairn India," the metal, mining and oil major said.

The I-T department has made a parallel tax demand on Cairn UK Holdings, for which the Edinburgh-based company has sought arbitration and is seeking compensation under the UK-India Investment Treaty.

Vedanta said the claim notice was the first step required prior to commencement of international arbitration pursuant to the BIT.

The company has been advised by leading international counsel that the retrospective tax legislation passed is a violation of protections accorded to investors under the BIT and constitutes a serious impairment of the treaty rights of Vedanta, it said.

"Vedanta and Cairn India will continue to take all necessary steps to protect their interest and the interest of their shareholders," it added.

Cairn Energy of the UK also recently sought compensation from the Government of India for the loss in value it suffered due to an "unfair and arbitrary" Rs 10,247 crore tax demand raised using a retrospective tax law.

Cairn argued that the imposition of capital gains tax on transfer of its India assets to Cairn India was not only contrary to relevant legal standards but unjust because it was an internal transaction and no shares or assets were sold to any third party to make any capital gains.