CAIRN ENERGY: THE TAX TANGLE

A15-year-old tax dispute has devolved into an ugly legal battle between the Indian government and UK’s Cairn Energy Plc., becoming a major source of international embarrassment for the Centre. On July 8, a Paris court ordered the freezing of over $23 million (Rs 195.5 crore) of Indian government assets in the French capital, partly enforcing a $1.2 billion (Rs 8,900 crore) arbitration ruling in Cairn’s favour by an international tribunal in December 2020. Cairn has also moved a US court seeking to make national carrier Air India liable so that its assets can be seized. India has challenged the tribunal’s verdict, but as far as the Paris court’s order goes, the Union finance ministry says India is yet to receive any official notification and that the Centre will adopt “appropriate legal remedies”.

Although the Centre is trying to put up a brave front, international courts have come down heavily on its handling of three such arbitration cases, relating to Cairn Energy, Vodafone and Devas Multimedia. These incidents have also compromised the Modi government’s bid to be seen as an investor-friendly dispensation. The Cairn Energy dispute relates to retrospective taxation, which also saw a previous Manmohan Singh government at loggerheads with Vodafone. In January 2013, the

Supreme Court had ruled in Vodafone’s favour in a case where the Centre had raised a $2 billion (around Rs 14,900 crore now) tax claim on the company, related to its acquisition of Hutchison’s assets in India in 2007. The apex court had ruled that a transfer of assets between two entities outside India could not be taxed in India, even if the asset was located in India. However, that year, then finance minister Pranab Mukherjee had introduced a retrospective taxation policy that brought several already concluded deals under the tax net. The Indian government thus demanded $1.2 billion from Cairn Energy as taxes related to a 2006 restructuring of assets it held in India. It was then that Cairn

$1.2 bn (Rs 8,900 crore):

India’s tax claims on Cairn Energy

$1.2 bn

Devas Multimedia’s arbitration award against India

$2 bn (Rs 14,900 crore):

The Centre’s tax claim on Vodafone

approached the Permanent Court of Arbitration at the Hague, arguing that the new tax laws violated the fair and equitable treatment promised under the IndiaUK bilateral investment treaty. India has argued that tax disputes are not protected by bilateral investment treaties.

In the Vodafone case, the Permanent Court of Arbitration ruled in September last year that India’s retrospective tax breached the “guarantee of fair and equitable treatment”. Meanwhile, in the Devas Multimedia case (Devas is a satellite broadband services firm that won a case against Antrix Corporation, an arm of the Indian Space Research Organisation), the company is demanding over $1.2 billion it won in international arbitration from India, and has joined Cairn Energy in a parallel bid to seize Air India’s assets abroad.

Experts say that in the Cairn Energy case, the Paris court was simply enforcing what the arbitration tribunal had awarded the company earlier, and that the Indian government can appeal the ruling in France’s higher courts. The bigger issue is that of retrospective taxation. “If the arbitration tribunal has taken the view that the retrospective amendment imposes a new tax and therefore affects the rights of foreign investors in India, there is an issue to be addressed,” says H.P. Ranina, a senior lawyer with the Supreme Court. “However, the Indian government says the retrospective amendment only clarified the existing Section 9 of the Income Tax Act.” According to the Centre, the retrospective amendment is not a new tax, and under the investment treaties, one cannot argue that foreign investors’ rights have been affected because they would have been advised by their tax counsels about the prevailing laws. Experts say the government should move the Supreme Court to re-examine its 2012 verdict and clarify the IT laws once and for all, so that investors know what to expect. This will also help the government avoid the continuing embarrassment of getting pulled up in international arbitration courts.