UK’s Cairn Energy, which became the first company to face coercive recovery in retrospective tax action, had created a maze of subsidiaries in a span of just six months to transfer Indian assets, an event that led to a demand of Rs 10,247 crore as dues.

According to documents accessed by PTI, Scotland-based Cairn Energy till 2006 held Indian assets, including the prolific Rajasthan oil fields, through nine Indian subsidiaries.

What followed was creation of layers of subsidiary firms and transfer of Indian assets. The tax department said the company made capital gains out of the restructuring, hence the tax demand.

When contacted, Cairn Energy spokesperson justified the structure, saying the company chose India listing over the option of getting the Indian company listed on UK bourses.

The structure it built had been presented to SEBI, the erstwhile Foreign Investment Promotion Board (FIPB) and the Reserve Bank of India in 2006 in a “transparent” manner.

On June 26, 2006, Cairn first created Cairn UK Holding Ltd (CUHL) and transfered the Indian assets to it. In return, it got 221.44 million shares of CUHL on June 30, 2006. It also got another 29.78 million shares for sale of 29.78 million pound debt on September 1, 2006.

On August 3, 2006, Cairn India Holding Ltd (CIHL) was incorporated in Jersey, Channel Islands —— a tax haven —— as a wholly—owned subsidiary of CUHL.

The Indian assets were transfered to CIHL which issued 221.44 million shares to CUHL, UK, on August 7, 2006. CUHL also sold debt of 29.78 million pound to CIHL, for which the Jersey firm issued another 29.78 million shares.

So, CUHL in all acquired 251.22 million shares of CIHL at one UK pound sterling apiece.

Thereafter, CUHL, UK, on October 12, 2006, sold 41.49 million shares of CIHL to newly—incorporated Cairn India Ltd, which transfered to the British firm Rs 5,037 crore for the same.

Three more such share transfers happened between November and December 2006. In all, the four transactions put together, 251.22 million shares of CIHL were sold to Cairn India for Rs 26,681 crore.

The income tax department, documents showed, calculated the cost of acquisition as 251.22 million pound (Rs 2,178 crore) considering the price at which the debt was transfered.

So, the capital gains CUHL made were calculated at Rs 24,503 crore (Rs 26,681 crore gained minus acquisition price of Rs 2,178 crore), the documents showed.

The tax department felt that a short—term capital gain tax should apply as CUHL had acquired 251.22 million shares of CIHL at the cost of 251.22 million pound in August—September 2006. The same was then sold to Cairn India within few months.

Cairn India was thereafter listed on stock exchanges through an initial public offering (IPO) that raised Rs 5,261 crore.

The short—term capital gain of Rs 24,503 crore at the hand of CUHL was confirmed by income tax tribunal ITAT in March, following which a demand note was sent seeking Rs 10,247 crore.

With the British firm not paying, the tax authorities first appropriated the Rs 1,500 crore of past tax refund that was lying and then took over USD 104 million of dividend income due to it from Cairn India.

“The interactions with multiple agencies of the Indian government underscores the extent to which Cairn transparently disclosed all elements of the contemplated transaction in India. Cairn is of the view that the company conducted the transaction in complete candour and openness with the Indian government,” Cairn Energy spokesperson said.

Cairn, he said, “can demonstrate that the 2006 transaction structure and the formation of holding companies was a function of the mandatory Indian securities and other regulations and they had definite economic purpose“.

“Cairn’s case is that none of the 2006 transactions was taxable in India according to the law in force at the time, which was also evident from the Indian government’s past practice, and that the detailed steps of those transactions were fully disclosed,” he said.