What is Cairn Tax Dispute? What was the Arbitration Court of Arbitration Rules in December 2020?
the story So Far: In December 2020, a three-member tribunal in the Netherlands Permanent Court ruled against India in a long-running tax dispute with Cairn Energy Plc, a UK-based oil and gas company, and a subsidiary, Cairn UK Holdings Limited. The tribunal ordered India to pay approximately $ 1.4 billion to the company. Subsequently, Cairn Energy has successfully moved courts in five countries, including the United States and the United Kingdom, to recognize their claim pursuant to the PTI arbitration award. The other three countries are Netherlands, France and Canada. Such recognition by the courts opens the way for Cairn Energy to enforce its claim to confiscate the property of the Government of India in its jurisdiction, if the latter does not pay its dues.
What is the dispute about?
The dispute began in early 2014 when Indian tax authorities began questioning Cairn Energy, requesting information on the group’s reorganization in the fiscal year 2006–07. This increased, and by 2015, officials had sent a draft assessment order to the company, assessing in the process that there was a major tax amount of $ 1.6 billion that was due to take place.
Read this also. According to sources, India filed an appeal against the Cairn Arbitration Award
The year 2006-07, in context, was one in which major corporate changes and developments took place at Cairn Energy. This was the year in which it not only undertook a corporate restructuring, but also started an Indian subsidiary, Cairn India, which was listed on Indian borders in early 2007. Through the corporate restructuring process, Cairn Energy transferred all of its India assets, which by then were transferred to the newly formed Cairn India by nine subsidiaries in various countries.
But the tax authorities claimed that in the process of this restructuring, Cairn Energy made a capital gain of Rs 24,500 crore. This, the department said, was the basis of the tax demand.
In 2011, UK-based Vedanta Resources bought a nearly 60% stake in Cairn India. In fact, four years after this, Cairn India received a tax notice for not withdrawing tax for the benefit it had received to its former parent company.
Read this also. Government may give oilfield to Cairn for $ 1.4 billion in arrears
Is this case like Vodafone’s fight with the Indian government?
In 2007, the Vodafone case was triggered by Hutchinson Telecom of Hong Kong from the sale of its stake in Hutchinson Essar, India, to Vodafone International Holdings in the Netherlands. The Hong Kong firm made capital gains on it, which the Indian tax authorities considered fit for tax. He considered that Vodafone should have withheld the tax, and therefore imposed liability on him. The Supreme Court rejected the taxpayer’s demand, concluding that it did not agree that the sale of shares in this case would “amount to the transfer of a capital asset within the meaning of section 2 (14) of the Indian Income Tax Act”.
In the Union Budget of 2012, the Income Tax Act, 1961 was amended to ensure that even if the transfer of shares takes place outside India, such transfer can be taxed if the value of those shares is held on property in India. is based. And it was implemented retroactively. The action against Cairn Energy was based on this move. India lost its arbitration case against Vodafone, as well as to the government. Around 80 crores were asked to fork.
Read this also. Vodafone Wins International Arbitration Against India In Tax Dispute Case Of -14,200 Crore
What happened after the tax claims in the Cairn Energy dispute?
After receiving a draft assessment order from the tax authorities, Cairn UK Holdings Ltd appealed before the Income Tax Appellate Tribunal. The tribunal retained the main tax demand, however, providing relief to the company from back-debt interest demands.
The company initiated arbitration proceedings under the UK-India Bilateral Investment Treaty. But during this time, according to a PTI report, “the government sold about 5% stake in Cairn’s Vedanta Ltd” (which the firm owned after it sold to Cairn India), “because of those shareholding. Seized a total dividend of Rs.40,175 crore. “, And” set a tax refund of 1,590 crore against the demand “.
What was Cairn Energy’s main argument during the arbitration?
Claimants from Cairn Energy and Cairn UK Holdings argued that there was no tax on indirect transfers (transfer by a non-resident of shares in non-Indian companies) until the tax was amended retrospectively in 2012. Who indirectly held property in India). He also said that the government had approved the 2006 reorganization. The 2012 amendment application, they alleged, constituted “express violation” of the UK-India bilateral investment treaty.
What was India’s defense during the mediation?
India’s counter to Cairn Energy’s principal charge was that its 2006 transactions were taxable despite the 2012 amendments.
It was argued that “Indian law has allowed long-term taxation where a transaction has a strong economic alliance with India”. It stated that even though it is retrospective, it is “valid and binding enforcing the constitutional, legislative and legal framework in which the claimants have invested”.
What decision did the arbitral tribunal give?
The tribunal said the tax demand violated the UK-India bilateral investment treaty. The tribunal said that India failed to seek fair and equitable treatment of Cairn Energy’s investment under a bilateral protection agreement with the United Kingdom.
It also ordered India to indemnify Cairn Energy and its subsidiary “to suffer a total loss” as a result of breaches of the treaty.
what next?
It has been reported in the media that India will appeal against the decision of the tribunal.
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