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Cairn Energy chief Simon Thomson. Image courtesy of Cairn Energy.

UK-based Cairn Energy filed a formal dispute Tuesday against the Indian Income Tax Department for a $1.6 billion bill tied to alleged unpaid taxes dating back to the 2006 to 2007 tax year.

The company said it received a notice for the taxes and related penalties shortly after reporting its annual results.

Cairn has been trying to exit India’s oil sector for over a year and has sold the majority of its stake in its Indian subsidiary, BBC said.

The company currently holds a 10 percent stake in Cairn India.

“Cairn strongly contests the basis of the draft assessment and the Notice of Dispute is supported by detailed legal advice on the strength of the legal protections available to it under international law,” the company said.

Under the terms of the UK-India Investment Treaty the Government of India and Cairn are now required to enter a period of negotiations to try to resolve the dispute.

If a satisfactory resolution can not be reached the dispute will be handed over to an intentional arbitration panel.

Cairn continues to be restricted by the Indian Income Tax Department from selling its 10 percent shareholding in Carin India currently valued at $700 million.

“Since the election of the BJP, senior Government Ministers have consistently commented on the negative impact the issue of retrospective taxation has had on international reputation and investor sentiment towards India,” Cairn chief Simon Thomson said.

Thomson added that the issue is confined to the company’s interest in India and said the group “remains well funded to deliver all of our objectives and commitments.”