India to pay $1.2 billion after losing arbitration against Cairn Energy

India has been ordered to return over $1.2 billion to Cairn Energy Plc after Prime Minister Narendra Modi’s administration lost arbitration proceedings in a tax dispute.

The International Court of Justice at The Hague has maintained that the Cairn tax issue is not a tax dispute, but a tax related investment dispute. Hence, it falls under its jurisdiction. It has ruled that India’s demand in past taxes was in breach of fair treatment under a bilateral investment protection pact. The case pertains to a Rs 24,500 crore tax demand on capital gains made by the oil major in reorganisation of its India business in 2006-07.

The Indian government has been asked to pay Cairn Rs 8,000 crore in damages, which include the shares attached by the Income Tax Department in January 2014 and sold in 2018 to partially recover the tax dues. Cairn Energy held 4.95 per cent stake in mining major Vedanta Ltd which the Income Tax Department attached after issuing a tax demand to the British firm in 2014. The government has been asked to pay damages at the share value of Rs 330 in 2014 instead of the Rs 220-240 per share price on which it was actually sold by the Income-Tax Department in 2018, in tranches. The damages also include Rs 1,590 crore of tax refund due to the British company besides the legal fees.

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

The order has taken note of arguments and statements by Bharatiya Janata Party leaders, while in Opposition that time over the retrospective tax amendments and the international disputes, with senior leaders like Arun Jaitley calling it ‘tax terrorism’.

Cairn had lost case at Income tax appellate tribunal (ITAT) and the matter is before High Court over the valuation of capital gains and not the constitutionality of the tax demand.

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 a capital gain 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, 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; it recently agreed to lift that freeze.

Source- Business Standard