Cairn Energy Case: Another Shock For Indian Government, GoI Lost Second Case In 3 Months

by Shatakshi Gupta

India has received a second setback in the International Arbitration Tribunal in three months in a matter related to retrospective levy of taxes. After Vodafone, the Indian government has also faced defeat against the British company Cairn Energy in an international arbitration award. The court has asked the Indian government to return $1.4 billion to Cairn Energy.

What was the issue?

Cairn Energy filed a dispute in 2015 against a demand of Rs 10,247 crore related to the re-organization of the group in 2006.  The Income Tax Department had then stated that Cairn UK Holdings, a wholly owned subsidiary of Cairn Energy, had earned a capital gain of over Rs 24,000 crore before the public listing of Cairn India.

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 In 2011, the 9.8% stake of Cairn India was sold to the rest of Vedanta Group.  The sale of the remaining stake was banned by the Income Tax Department and the dividend payment to Cairn Energy was also freeze by Cairn India.

The case was filed in March 2015

 Cairn filed a formal dispute in March 2015 against India’s tax department’s demand of over $1.6 billion. This tax dispute was related to the listing of its Indian operation at that time in 2007.

Cairn’s claim was brought under the terms of the UK-India Bilateral Investment Treaty. The legal seat or battle of the tribunal was in the Netherlands and the proceedings were conducted under the Registry of the Permanent Arbitration Court.

Permanent Court Of Arbitration

Arbitration Award

 Cairn Energy said on Wednesday that it had won an arbitration award against the Indian government, seeking Rs 10,247 crore as tax with the retrospective effect. According to sources, the three-member tribunal ordered that the Indian government’s tax claim of Rs 10,247 crore was not valid for Cairn internal reorganization of its India business in 2006-07.

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 The tribunal also asked the Government of India to return Cairn a dividend, a withholding of tax refund, and an interest from the partial sale of shares for recovery of dues.  Confirming the decision, Cairn said in a statement, “The tribunal has given a ruling in favour of its claim against the Indian government.” The Indian government cited the UK-India bilateral investment agreement, a pre-2012 tax law with effect. Under this, the company challenged the demand for tax on the reorganization of Cairn’s Indian business.

 Cairn said, “The tribunal unanimously ruled that India violated its obligations to Cairn under the UK-India bilateral investment treaty and would have to pay US $1.2 billion in damages and interest costs.”  This is the second setback in the last three months. Earlier in September, an international arbitration tribunal ruled against the tax imposed by India on Vodafone Group with prior effect.

 Option for India

Source: ANI News

 The order comes after the Vodafone Group won a separate arbitration on retrospective amendments to tax laws.  India is yet to challenge the arbitration award.  In the case of Cairn Energy, the government can also challenge this award.  Tax experts say that it is likely that the Indian government will review the Arbitral Award in detail before deciding on the next steps and may prefer to go to appeali