CAIRN Energy has suffered a blow after being landed with a $1.6 billion (£1.1bn) billion tax bill by the Indian tax authorities but insists it has paid all taxes due.

Shares in the company fell seven per cent following news of the demand. This came after Cairn's chief executive Simon Thomson underlined the company's enthusiasm for the North Sea in spite of the plunge in oil prices.

Mr Thomson said Cairn is still confident of generating big returns from the heavy investment it is making in developing the giant Catcher and Kraken fields off Scotland with partners.

"These are two of the largest field developments in the North Sea," said Mr Thomson, after Cairn announced its 2014 results. "From our perspective they are robust, they're on budget, they're on schedule and they're going to provide us with good cash flow."

Mr Thomson's comments provide a vote of confidence in the North Sea at a time when experts predict firms will slash investment in the area in response to the plunge in the crude price since June.

While giants such as BP have made deep cuts in the valuations of their North Sea portfolios, Cairn said it has maintained the book value of the assets it is developing.

Cairn acquired interests in the North Sea under Mr Thomson's plan to build a portfolio that balanced lower risk activity in the area with potentially transformational drilling in relatively under-explored areas.

He said Cairn will not do further drilling off Greenland unless it can persuade new partners to buy into its acreage in the area. Cairn has spent $1bn drilling off Greenland without making a commercial find. The company said it has written off $23m remaining Greenland costs in 2014.

However, Mr Thomson noted the company enjoyed significant success last year on the frontier acreage it has acquired off Senegal, where it made two significant finds. "Let's focus on what we've got and what we've found and for us that's all about Senegal," he said. Cairn is planning to drill up to six wells off Senegal in coming months.

The surprise move by the income tax department in India provides an unwelcome complication for Cairn which made bumper finds in the country.

Cairn has been embroiled in a tax dispute in the country since January last year. It has been prevented from selling its remaining stake in its former Indian subsidiary pending resolution of the dispute. The stake was worth $700m at 31 December.

Speaking before Cairn got notice of the Indian tax demand yesterday, Mr Thomson said: "We're in a strong position notwithstanding the oil price and notwithstanding India to deliver everything that we want to deliver in terms of our strategic direction."

Yesterday afternoon Cairn announced it had received a draft order for $1.6bn in respect of the 2006/07 tax year. The company floated its former Indian subsidiary in the country in December 2006.

In Cairn's announcement of the order, Mr Thomson said: "Against a backdrop of regular engagement with the Government of India since January 2014 it is very disappointing to have received a draft assessment order at this time."

He added: "Cairn has consistently confirmed that it has been fully compliant with all relevant legislation and paid all applicable taxes in India."

Cairn had $869m cash at 31 December, and a $575m undrawn lending facility. The company lost $381m after tax in 2014, down from $556m in the preceding year.

Shares in Cairn Energy closed down 14.7p at 183.4p.