Retro tax: Amid stand-off, Cairn Energy holds ‘constructive’ meeting with Union finance secretary

By: |
February 19, 2021 6:15 AM

On November 18, the GoI told the Delhi High Court it is yet to take a call on whether to challenge the Vodafone award. It was then presumed that the government was waiting for the Cairn verdict, which was due.

cairn energyThe state then expropriated and liquidated Cairn's remaining shares in the Indian entity, seized dividends and withheld tax refunds to recover a part of the demand.

Amid Cairn Energy’s reported move to recover a $1.4-billion arbitral award in its favour by attaching and seizing Indian assets overseas and New Delhi’s rumoured plans to contest the award, the Edinburgh-headquartered energy company’s chief executive Simon Thomson met Union finance secretary Ajay Bhushan Pandey here on Thursday. While the development kept alive hopes of a reconciliation, Thomson, as he came out of the meeting, said the talks were ‘constructive’, without elaborating.

“We just want to go in and have a conversation and see what the government has got to say, but we look forward to a positive resolution of this,” Thomson had said minutes before the meeting.

Neither the company nor the Indian government came out with official statements about the meeting till late evening.

Reuters reported on Wednesday that Cairn Energy filed a case in a US district court to enforce the arbitration award it won in a tax dispute against India, citing a court document. The company has reportedly filed similar cases in the UK and the Netherlands.

In December 2020, the Permanent Court of Arbitration at The Hague had not only invalidated India’s $2.74-billion 2015 tax claim on Cairn Energy, but also ordered it to return up to $1.4 billion in funds withheld, interest and costs, to the firm.

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.

After the international arbitral award in December, Cairn had said it had been awarded $1.2 billion damages plus interest and costs, potentially adding up to $1.4 billion or thereabouts.

Cairn (now Vedanta in India) has been a major foreign investor in India since 1990s with cumulative investments to the tune of $6 billion; it is credited with more than 40 hydrocarbon discoveries, initially on the east coast (Ravva field) and then the west coast (Barmer), where it was more prolific.

The tribunal has ordered the government to return the value of shares it had sold, dividends seized and tax refunds withheld to recover the tax demand. The government was asked to compensate Cairn “for the total harm suffered” together with interest and cost of arbitration.

“We will consider all options and take a decision on the further course of action, including legal remedies before appropriate fora,” the government had then said in a statement.

Although the government is armed with an opinion from the Solicitor General that an “arbitral tribunal can’t render a law passed by a sovereign Parliament ineffective”, analysts say the two decisive rulings of The Hague tribunal, both delivered unanimously, must weigh on its mind.

On September 25, the Vodafone had won the international arbitration case against Delhi; the Hague Court held India was in breach of the India-Netherlands Bilateral Investment Treaty in making a tax demand of Rs 22,000 crore on the firm, by retrospectively amending the law. It also asked India to pay 4.3 million pounds ($5.47 million) to the company as compensation for its legal costs.

On November 18, the GoI told the Delhi High Court it is yet to take a call on whether to challenge the Vodafone award. It was then presumed that the government was waiting for the Cairn verdict, which was due.

Appearing for Vodafone-Idea, senior counsel Harish Salve recently 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.

The Cairn tax dispute may be sequenced as follows: In 2006-07, as a part of internal rearrangement, 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.

In 2011, Cairn Energy sold majority of its 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.

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