INTERNATIONAL PANEL REJECTS STAY ON CAIRN ARBITRATION
In a setback to India, an international arbitration panel has rejected its demand for a stay on an the arbitration initiated by British oil explorer Cairn Energy Plc against a ~10,247- crore retrospective tax notice. The panel has also turned down India’s application for bifurcation of the issue of whether the tax is covered under the India-UK bilateral investment protection treaty, sources said. In January 2014, the income-tax department had charged Cairn Energy of making capital gains on transfer of India assets to a newly created firm, Cairn India, and listing it on stock exchanges.
In a setback for India, an international arbitration panel rejected its demand for a stay on an arbitration initiated by British oil explorer Cairn Energy against a ~10,247-crore retrospective tax notice.
The panel, comprising three judges of international repute, also turned down India’s application for bifurcation of the issue of whether tax is covered under India-UK bilateral investment protection treaty, sources privy to the development said.
The income tax department, in January 2014, had charged Cairn Energy of making capital gains on transfer of India assets to a newly created firm, Cairn India and listing it on stock exchanges.
Instead of applying longterm capital gains tax, it levied a short-term capital gains tax and slapped a draft tax demand of ~10,247 crore. Also, it debarred Cairn Energy from disposing of its remaining 9.8 per cent stake in Cairn India, which the British firm had sold to Vedanta Group in 2011.
In April 2014, the tax department slapped a ~20,495crore demand on Cairn India, the UK firm’s erstwhile subsidiary for failing to deduct tax on the capital gains.
Both firms denied any tax was due and initiated arbitrations — Cairn Energy under India-UK investment treaty and Vedanta under India-Singapore investment treaty.
Sources said India sought a stay on proceedings in Cairn Energy’s arbitration for potentially five years, stating it was “unfair” that they had to defend two cases at once. However, it was the Indian government’s decision to join the arbitration and, hence, it could not go back on anyone of them.
A three-member arbitration panel headed by Genevabased arbitrator Laurent Levy, which began hearing Cairn Energy’s demand for $5.6 billion in compensation from the Indian government for raising a retrospective tax demand in May last year, rejected the application for ‘stay’ on March 27, they said. It rejected the bifurcation application on April 19, sources said, adding India could, however, continue to argue that tax matters were not covered under bilateral investment treaties under the main arbitration.
Both the applications were seen as delaying tactics on part of the Indian government, which did not file its statement of defence to Cairn’s demand by the November 11, 2016 deadline set by the panel.
It also missed the extended deadline of mid-January, only to file it by February 4.