Cairn Energy – Government of India Dispute

Of late, media reports began pouring in saying that Cairn has initiated legal proceedings against New Delhi in the US, UK, France, Quebec, Netherlands and Singapore to enforce the award. Some reports even stated that Cairn sued Indian Government entities, including Air India. Did you ever wonder what exactly has been going on? What is the award being talked about here? Read on for a detailed analysis of the whole dispute.

Cairn Energy PLC is a leading European self-governing oil and gas exploration and development corporation. In 2015 it launched an international arbitration to confront retrospective taxation imposed by the Government of India. On 23 December 2020, the court passed its verdict. Consequently, in a press release, Cairn declared, “the tribunal established to rule on its claim against the Government of India has found in Cairn’s favour“. The Indian government acknowledged the verdict. However, GoI maintains that the dispute is centrally about taxes and not investment. It effectively means that the issue is a domestic affair and not within the jurisdiction of the Hague Tribunal.

The verdict was a back-to-back setback for the Indian administration after the September 25 judgment wherein the Singapore seat of the Permanent Court of Arbitration had unanimously concluded that the Indian government’s encumbrance of a tax-liability on Vodafone was “in breach of the guarantee of fair and equitable treatment“. India has, however, chosen to appeal against the Vodafone judgment.

The entire trouble started brewing when Cairn got its first I-T notice in January 2014 on account of the 2006-07 internal rearrangement. Under this agreement, Cairn UK transferred shares of Cairn India Holdings to Cairn India. The Indian Income Tax Department had claimed that Cairn UK had accumulated capital gains over Rs 24,500 crores, thus slapping it with a tax demand of an equivalent amount.

It was a consequence of India’s retrospective tax introduced in 2012 by the then Finance Minister Mr Pranab Mukherjee. The amendment made any capital gains resulting from share transfers from a foreign entity whose assets were in India taxable from 1962. It was undoubtedly endeavoured at circumventing the Supreme Court‘s ruling in an earlier case. In this case, the SC had ruled that the Vodafone Group’s interpretation of the Income-Tax Act of 1961 was accurate and that it did not have to pay any taxes on the stake acquisition. The 2012 tax introduction gave the I-T Department authorization to retrospectively tax such transactions.

Cairn declined to pay the tax on account of varying accounts of capital gains, therefore, leading to the filing of cases at the Income Tax Appellate Tribunal (ITAT) and the High Court. Cairn lost the case at ITAT. Another petition on the valuation of capital gains remains pending before the Delhi High Court.

In 2011, Cairn Energy traded the majority of its Indian venture, Cairn India, to the Anil Agarwal owned mining conglomerate Vedanta. Following this, the government seized Cairn Energy UK’s 10 per cent stake in Cairn India – the outstanding share after the 2011 deal, seized dividends equaling ₹1,140 crore due to it from those shareholdings, and set off a ₹1,590-crore tax refund against the demand.

In a 582-page order, the PCA directed the government to abstain from soliciting such a tax and remunerate the worth of shares it had marketed, dividends seized, and tax refunds withheld to retrieve the tax demand. It directed the government to compensate Cairn “for the total harm suffered” together with the interest and cost of arbitration. The judgment, therefore, requires the government to reimburse a whopping amount of $1.2 billion (roughly Rs 8,800 crore) to Cairn Energy PLC. The verdict also permits Cairn to approach courts in countries like the UK to seize any assets owned by India abroad to retrieve the funds if the judgment is not honoured.

This verdict, therefore, has led to the filing of multiple lawsuits in various countries along with suing Indian PSUs. Additionally, the award is sanctioned by the New York Convention, because of which Cairn can identify and seize Indian assets located in the countries that are signatories to the Convention. These assets may comprise bank accounts and properties of Indian state-owned companies (PSUs), apart from assets of the Indian government itself.

New Delhi, too, has decided to challenge the verdict of the Permanent Court of Arbitration in the Dutch Courts of Appeal. Twice in three months, the Indian administration has refused to accept an international award against retrospective tax.

Some backchannel discussions have taken place as well. Top executives of Cairn have met with high ranking government officials to try and reach an out-of-court settlement, with no luck. Cairn had even proposed to invest the entire financial award in India, provided that the government abandons the appeal it filed in March. Yet, India cannot and will not accept the offer due to the precedent the case could set, placing her at more substantial risk.

The final verdict is nevertheless due.
The case, therefore, is still on!

Gaurav Chakraborty is a student pursuing Economics from Jamia Millia Islamia.

Edited by: Malaika M Khan

Disclaimer: The opinions expressed in this publication are those of the author. They do not purport to reflect the opinions or views of The Jamia Review or its members.