India loses Cairn case in arbitration; asked to pay Rs 8,842 cr in damages

The Ronin · Dec 24, 2020

In a major setback, the Indian government has lost an international arbitration case to energy giant Cairn Plc over the retrospective levy of taxes, and has been asked to pay damages worth $1.2 billion (Rs 8,842 crore) to the UK firm. The verdict came on Tuesday night, barely three months after India lost arbitration to Vodafone Plc over the retrospective tax legislation amendment.

The Permanent Court of Arbitration at The Hague has maintained that the Cairn tax issue is not a tax dispute but a tax-related investment dispute and, hence, it falls under its jurisdiction. India’s demand in past taxes, it said, was in breach of fair treatment under the UK-India Bilateral Investment Treaty.

The case pertains to the Rs 24,500-crore tax demand on capital gains made by the oil major in the reorganisation of its India business in 2006-07.

The damages awarded to Cairn include the shares attached by the income-tax (I-T) department in January 2014 and sold in 2018 to partially recover the tax dues. Cairn Energy had held a 4.95 per cent stake in mining major Vedanta Ltd which the I-T department attached after issuing tax demand to the British firm in 2014. The government has been asked to pay damages at the share value of Rs 330 as of 2014, instead of Rs 220-240 apiece on which it was actually sold by the I-T department in 2018 in tranches. The compensation also includes Rs 1,590 crore in tax refund due to the British company, besides the legal fees.

The verdict has also noted the argument by the Edinburgh-based company, that the tax demand came up after the Vodafone tax case, which was quashed by Indian courts.

Reacting to the order, the government in a statement said it would be studying the award and all its aspects carefully in consultation with its counsel. “After such consultations, the government will consider all options and take a decision on further course of action, including legal remedies before appropriate fora,” it said.

The tribunal’s order has also taken note of arguments and statements made by Bharatiya Janata Party leaders, while in opposition, over the retrospective tax amendments and international disputes, with senior leaders like Arun Jaitley calling it “tax terrorism”.

Cairn Plc said the tribunal established to rule on its claim against the government of India and in its favour. Cairn’s claim was brought under the terms of the UK-India Bilateral Investment Treaty, the legal seat of the tribunal was the Netherlands, and the proceedings were under the registry of the Permanent Court of Arbitration.

The tax demand by India was in respect of Cairn UK transferring shares of Cairn India Holdings to Cairn India as part of an internal group reorganisation in 2006-07. This gave rise to different interpretations on whether the UK-based company made capital gains, preceding an initial public offering (IPO) of shares by Cairn India. The I-T department had contended that Cairn UK made capital gains of Rs 24,503.5 crore. Before the Cairn India IPO, the India operations of Cairn Energy were owned by a company called Cairn India Holdings-Cayman Island and its subsidiaries. Cairn India Holdings was a fully owned subsidiary of Cairn UK Holdings, in turn a fully owned subsidiary of Cairn Energy.

At the time of the IPO, the ownership of the India assets was transferred from Cairn UK Holdings to a new company, Cairn India. In 2006, Cairn India acquired the entire share capital of Cairn India Holdings from Cairn UK Holdings. In exchange, 69 per cent of the shares in Cairn India were issued to Cairn UK Holdings. Hence, Cairn Energy, through Cairn UK Holdings, held 69 per cent in Cairn India.

Later, in 2011, Cairn Energy sold Cairn India to mining billionaire Anil Agarwal’s Vedanta group, barring a minor stake of 9.8 per cent. It wanted to sell the residual stake as well but was barred by the I-T department from doing so. The government also froze payment of dividend by Cairn India to Cairn Energy.