INDIA TO STUDY CAIRN ENERGY ARBITRATION AWARD
Author: Aarushi Sharma, NLU, Shimla
Abstract
UK’s Cairn Energy Plc has won an arbitration against the Indian government levying 10,247 rupees in retrospective taxes. The tribunal asked India to pay the funds withheld along with the interest to the Scottish oil explorer for seizing dividend, tax refund, and sale of shares to partly recover the dues. Cairn had challenged the Indian government seeking taxes over an internal business reorganisation using the 2012 retrospective tax law, under the UK-India Bilateral Investment Treaty. The three-member tribunal, which also comprised of a judge appointed by the Indian government, ruled that India’s claim of ₹10,247 crore in past taxes over a 2006-07 internal reorganisation of Cairn’s India business was not a valid demand, sources said.
This is the second blow to the government over the retrospective tax issue in three months. A separate international arbitration tribunal had in September ruled against India levying retrospective taxes on Vodafone Group.[1]The oil-major said that the tribunal had announced the award unanimously following which the Indian government will have to pay the UK-based company damages of $1.2 billion and interest.
“It is likely that the Indian government will review the arbitral award in detail before deciding on the next steps and perhaps prefer an appeal,” said Ravi S. Raghavan, tax counsel at Majmudar & Partner law firm.However, experts added that the award by the tribunal was not likely to bring an end to all tax litigation around the indirect share transfer issue.
In 2011, Cairn India was sold to Vedanta Group, except for 9.8% stake. The residual stake sale was barred by the income tax department, and dividend payments by Cairn India to Cairn Energy were also frozen.[2]According to Cairn, it is seeking full restitution for losses resulting from: the expropriation of its investments in India in 2014, continued attempts to enforce retrospective tax measures and the failure to treat the Company and its investments fairly and equitably.
It also said it is not claiming for any form of special, punitive or consequential losses; the only damages that are equal to the value of the Group’s residual shareholding in CIL (Cairn India Limited) which was lost when the Income Tax Department (IITD seized it and subsequently sold it (retaining the proceeds), plus a further tax refund due to Cairn in an unrelated matter which has was also seized by the IITD, amounting to approximately Rs.10570 Crore (US$1.4 billion).According to the company, it has legal advice confirming that the maximum amount that could ultimately be recovered from Cairn by the IITD is limited to the value of Cairn UK Holdings Limited (CUHL’s) assets, principally the ordinary and preference shares in VL, almost all of which have already been sold and/or redeemed, plus the seized dividends and tax refunds from 2009 and 2011.[3]
While the order does not contain a provision for challenge or appeal against the award, the government said it will study the arbitration award and “will consider all options and take a decision on the further course of action, including legal remedies before appropriate fora.”Cairn, according to people aware of the matter, can use the arbitration award to approach courts in countries such as the UK to seize any property owned by India overseas to recover the money if the award is not honoured. The government has to reimburse Vodafone 60 per cent of its legal costs and half of the 6,000 euros cost borne by Vodafone for appointing an arbitrator on the panel. Sources said the Government of India’s liability came to Rs 85 crore in legal cost.
Vodafone International Holding in February 2007 bought 100 per cent shares of Cayman Island-based company CGP Investments for USD 11.1 billion to indirectly get 67 per cent control of Hutchison Essar Ltd – an Indian company.The Tax Department felt the deal was designed to avoid capital gain tax in India and so imposed a tax demand, which was rejected by the Supreme Court in 2012. To stop abuse and plug the loophole of such indirect transfer of Indian assets, the government in 2012 amended the law to make such transfers taxable in India, they said. [4]The amount is nearly equal to London-listed Cairn’s market value of $1.3 billion as of Tuesday’s close.[5]
Reference
[1] India to study arbitration case award in Cairn Energy, available at: https://www.livemint.com/news/india/govt-to-study-arbitration-case-award-in-cairn-energy-11608713103148.html (last visited: 30-12-20).
[2] Gulveen Aulakh, “India to study arbitration award in Cairn Energy, to consider all options,” The Economic Times, 23 December 2020.
[3]Editorial, “Cairn tax case: FinMin to study arbitration award before taking a decision “, The Hindu Businessline, 30 December 2020.
[4] PTI, “Retrotax Arbitration: India ordered to pay up to $ 1.4 billion to Cairn Energy,” Financial Express, 30 Dec 2020.
[5]Aditi Shah and Aftab Ahmed, “Cairn wins over $1.2 billion from India in tax arbitration case “, 30 December 2020.
La Senatus Scriptors 