Sarat Chandra IAS Academy

Retrospective tax dispute between India and Cairn Energy

Retrospective tax dispute between India and Cairn Energy

#GS3 #Taxation #Important International Institutions

Context: Britain’s Cairn Energy Plc has secured an order from a French court authorising the freezing of 20 Indian government properties in Paris valued at over 20 million euros.

  • This is the first court order secured against India to enforce a $1.2-billion arbitration award that Cairn Energy had won against the Indian government in the retrospective tax dispute.

Background:

  • The arbitration between India and Cairn challenged the India retrospective taxation policy.
    • In 2012, India brought in legislation mandating retrospective tax demands over deals going back to 1962 in which shares in non-Indian companies were transferred to an Indian holding company.
  • In 2006, Cairn made a bid to consolidate its Indian assets under a holding company — Cairn India Limited.
  • Indian tax officials claimed capital gains tax of over Rs 6,000 crore by Cairn UK for the transactions in 2006, even though the transactions had previously been cleared by them.
  • Even the Supreme Court had ruled against the retrospective reading of the law by tax officials in the case of Vodafone. However, Parliament passed a law mandating retrospective taxation over “transfer of Indian assets.”
  • This retrospective taxation, Cairn argued, was in breach of the UK-India Bilateral Investment Treaty which had a standard clause that obligated India to treat investment from UK in a “fair and equitable manner”.
  • In 2014, the Indian tax department had demanded Rs 10,247 crore in taxes.
  • In 2015, Cairn Energy Plc commenced international arbitration proceedings against the Indian government.

Why is Cairn going after Indian assets?

  • In December 2020, a three-member international arbitral tribunal at the Permanent Court of Arbitration in the Netherlands ruled unanimously that the Indian government was “in breach of the guarantee of fair and equitable treatment”, and against the India-UK Bilateral Investment Treaty, and that the breach caused a loss to the British energy company and ordered compensation of $1.2 billion.
  • The Indian government is yet to accept the arbitration award.

What are the assets Cairn is going after?

  • Cairn Energy has so far registered the arbitration award in several countries, where it has identified Indian assets worth over $70 billion.
  • This includes jurisdictions in the US, UK, Canada, Singapore, Mauritius, France and the Netherlands.

What are India’s options going forward?

  • While it is the first one to succeed for Cairn, the French court order boosts its chances in other jurisdictions.
  • The assets will be tangled in legal dispute and India will join a list of countries that includes Pakistan, Afghanistan whose assets were seized abroad.
  • Unless it can be proved that the arbitration awards against India are mala fide in the appeals, the award can be enforced in foreign jurisdictions. However, a settlement between the two parties cannot be ruled out.

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