Scottish oil and gas exploration and production firm Cairn Energy has filed a dispute notice against the Indian income tax department on a $1.6bn tax claim for the March 2007 fiscal year.

The dispute notice was filed under the terms of the UK-India Investment Treaty, which will see Cairn and the Government of India start negotiations to find a resolution to the dispute.

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An international arbitration panel will rule on the matter if no agreement is reached between the parties.

"Cairn has consistently confirmed that it has been fully compliant with all relevant legislation and paid all applicable taxes in India, and we are confident of our position under the UK-India Investment Treaty."

The investigation from the Indian Income Tax Department was related to transactions carried out to reorganise the company’s structure for Cairn India’s initial public offering in 2007.

Vedanta Resources acquired controlling shares in Cairn Energy’s India unit in 2011. The company’s stake in Cairn India was reduced to about 10% after the transaction.

The tax department’s investigation, which began in January 2014, did not allow Cairn to go ahead with the sale of its 10% stake in Cairn India, valued at around $700m.

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Cairn said it will seek restitution of losses resulting from the attachment of its stake in Cairn India since 2014.

Cairn Energy chief executive Simon Thomson said: "Cairn has consistently confirmed that it has been fully compliant with all relevant legislation and paid all applicable taxes in India, and we are confident of our position under the UK-India Investment Treaty.

"This issue is confined to our interests in India and the group remains well funded to deliver all of our objectives and commitments, and we look forward to moving forward with our strategy whilst this issue is resolved under legal process."