India’s offer to Cairn in $1.4-bn arbitration battle: ‘Pay half the dues and move on’

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February 20, 2021 5:15 AM

Govt feels it is going to be tough for the company to enforce the arbitral award

In its December 2020 ruling, the Permanent Court of Arbitration at The Hague invalidated India’s $2.74-billion 2015 tax claim on Cairn Energy.In its December 2020 ruling, the Permanent Court of Arbitration at The Hague invalidated India’s $2.74-billion 2015 tax claim on Cairn Energy.

Discussions between finance ministry officials and Cairn Energy CEO Simon Thomson – and his team – continued for the second day on Friday, but it appears the government wants Cairn to settle the dispute using the Vivad se Vishwas scheme; under the scheme, the company will have to pay around half the amount due sans interest and penalties in cases where the tax department has lost a case in a forum and filed an appeal, as the instant one.

Simultaneously, the government has also decided that it will challenge the arbitration award.

While Cairn has filed a case in a US court to enforce the $1.4-billion arbitration award ($1.2 billion plus interest and penalties) that it has just won and this can, eventually, even lead to Indian assets – properties of Indian embassies, even possibly Air India’s planes – being attached, finance ministry sources feel that this is not going to be easy either and can be a long-drawn process. In which case, their hope is that Cairn recognises that the value of its money will keep declining and so its best bet is pay part of the taxes and then move on.

It is not clear whether, while challenging the arbitration award, the government will also approach the Supreme Court (SC) to reject the award on grounds that it is antithetical to India’s policy. The government has done this for most awards that have gone against it, such as the Antrix-Devas one, but the response of the SC has been mixed.

Last year, the apex court turned down a government appeal to stop a $476-mn award that Vedanta and Videocon had won way back in January 2011. And while hearing the government appeal against the $672-mn arbitration award that Devas Multimedia won in 2016 against Isro-arm Antrix Corporation, the fact that the SC asked Devas whether it would be willing to waive off the interest component of the money owed to it suggests the challenge may not hold.

There are, on the other hand, also cases where SC has ruled against enforcing arbitration awards on grounds that they ran contrary to India’s public policy; this was the argument the government made in SC while asking for the award to be set aside.

In its December 2020 ruling, the Permanent Court of Arbitration at The Hague invalidated India’s $2.74-billion 2015 tax claim on Cairn Energy.

In 2011, Cairn Energy sold majority of its then India business, Cairn India, to Vedanta. The Indian taxman, however, did not allow Cairn UK to sell 10% and attached Cairn India shares as well as dividends that the company paid to its parent. The Hague court ordered the government to return the value of shares it had sold, dividends seized and tax refunds withheld. In fact, the government was asked to compensate Cairn “for the total harm suffered” together with interest and cost of arbitration.

Confirming New Delhi’s resolve to contest the arbitration award in favour of the Edinburgh-headquartered energy company, ministry sources said that the government would “strongly contest other suits filed by the firm at various other international courts” to enforce the award. Cairn Energy has recently filed a case in a US district court to enforce the arbitration award; it has also reportedly filed similar cases in the UK and the Netherlands.

“The government welcomes Cairn’s move to reach out for a resolution. However, any dispute resolution to be sought by Cairn will have to be within already existing laws,” a ministry source said, stressing on sovereign right to tax. “Cairn had conducted transactions via tax havens to evade taxes,” the source iterated, even as he added that the government welcomed Cairn’s move to reach out for a resolution.

New Delhi’s 2012 law had empowered itself to make tax demands concerning cross-border deals all the way back to 1962, citing ‘underlying Indian assets’. The move has since been exposed as a misadventure as The Hague Court ruled against against India in the two resultant high-profile cases – before Cairn Energy, telecom giant Vodafone had won a similar arbitration against India.

In its 582-page order in the Cairn case, three-member tribunal, including India’s nominee J Christopher Thomas QC, said that the retrospective tax demand was “in breach of the guarantee of fair and equitable treatment”. Affirming its jurisdiction over the case, the tribunal said the Cairn case was not just a tax-related, but an investment-related dispute.

The India government’s contention is that tax orders, including those under retrospective laws, cannot be arbitrated under bilateral investment treaties (BITs). Affirming this stance, the government brought in a new model BIT in 2016, explicitly excluding tax matters from its purview. It also simultaneously started a process of modifying existing bilateral investment pacts on these lines, while also seeking to make sure any new agreement will stick to the rule. However, since these treaties are bilateral, a unilateral policy shift doesn’t suffice to make a difference, and there have yet been been few instances yet of any big country endorsing India’s amended BIT.

Since the Hague Tribunal has affirmed its jurisdiction over the Cairn case despite the existence of the India-UK BIT, the chances of a reversal of the order in a review is remote. Virtually, a reversal is possible only if mala fide in the award is established.

Cairn tax dispute may be sequenced as follows: In 2006-07, as a part of internal rearrangement through a firm in European tax haven of Jersey, Cairn UK transfers shares of Cairn India Holdings to Cairn India. The taxman then raises a demand of capital gains tax on Cairn UK amounting to $2.74 billion. The firm disputes the demand and the matter is heard by the I-T Appellate Tribunal and then the Delhi High Court. While Cairn lost the case at ITAT, a case on the valuation of capital gains is still pending before the high court.

On November 18, the GoI told the Delhi High Court it is yet to take a call on whether to challenge the Vodafone award. Appearing for Vodafone-Idea, senior counsel Harish Salve has told the Delhi High Court that the telecom major will not proceed with the second arbitration – this one over New Delhi’s alleged violation of India-UK treaty – until the international award already passed (in connection with the Netherlands treaty) is set aside, if at all.

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