CAIRN Energy has said it will be able to continue with a programme that includes a $400 million (£245m) exploration drilling campaign, in spite of becoming embroiled in a potentially costly tax dispute in India.

The Edinburgh-based company said it has been "restricted" from selling any of its $1 billion stake in Cairn India, pending resolution of a probe into how much tax it should have paid.

The dispute concerns the company's tax bill for 2007, during which Cairn completed a £980m initial public offering of its former subsidiary in India.

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Cairn believes it has met all of its liablities in full.

However, Indian authorities appear to be using a recent change in the law to try to get more tax from the company.

A week after noting it had received an official request for information regarding its income tax assessments for the year ended 31 March 2007, Cairn explained: "The correspondence received from the Indian Income Tax Department indicates that this is in respect of amendments introduced in the 2012 Indian Finance Act, which seek to tax prior-year transactions under retrospective legislation."

A report in India said the authorities wanted to charge tax on big gains they claim Cairn made on the transfer of assets from subsidiaries incorporated in Jersey to the newly incorporated Indian business in 2006.

Cairn said it had re-confirmed with its advisors that it had been fully compliant with the tax legislation in force in each year.

It told investors: "Cairn intends to take whatever steps are necessary to protect the company's interests and to defend its position, "

The company played down the implications of the dispute saying: "Cairn will continue to pursue its current exploration and development programme as planned."

With $1.25bn cash in the bank at 31 December, Cairn does not appear to be under any pressure to sell off its remaining 10% holding in Cairn India to fund its activities.

However, the dispute could be a costly and time-consuming irritation.

Asked when the company expected the matter to be resolved, a spokesman for Cairn said only: "The company is collating information and will provide whatever is necessary for the Indian authorities. We will work in as timely a fashion as possible to resolve this."

While Cairn has made bumper finds in India, it has faced big challenges operating in the country.

The company spent 12 months wrangling with ministers in India before it won approval for the sale of the bulk of its operations in the country to Vedanta Resources, for $5.4bn (£3.3bn).

The sale was agreed in August 2010. It did not win official approval until the following August, in spite of the intervention of Prime Minister David Cameron on Cairn's behalf.

Cairn only won approval after agreeing to official conditions that resulted in a $600m (£375m) cut in the maximum proceeds that it could receive, before tax.

The conditions changed the terms of the royalties payable on production in India in favour of Cairn's partner ONGC.

Sir Bill Gammell, the former Scotland rugby internationalist who was chief executive when the deal was agreed with Vedanta, had said changes to the royalty regime would infringe the sanctity of the relevant production sharing contract.

Sir Bill was succeeded as chief executive by Simon Thomson in July 2011, when he became chairman.

In January Mr Thomson said Cairn had built a long-term sustainable business, which combines frontier exploration in areas like West Africa with less risky activity in the North Sea. The company plans to drill four wells in the North Sea in 2014, with four off Africa and one off Ireland.

Vodafone and Royal Dutch Shell have received demands for additional tax in India.

Shares in Cairn Energy closed down 1.3p at 215.6p.