If the govt keeps challenging the award—and losing—India may soon become a no-go for investors
New Delhi’s response to Cairn Energy Plc having obtained an order to attach Indian assets in France, a step towards recovering a part of its dues from a tax dispute, has been predictable. The finance ministry says it will explore appropriate legal options to protect its interests but remains open to an amicable solution within the legal framework. It goes without saying the Indian government is well within its rights to appeal any order or verdict in any jurisdiction. However, this dispute has dragged on for far too long now, and is becoming ugly. Rather than prolonging the matter, it would be in New Delhi’s interests to accept the arbitration award, explore settlement options and pay up. Cairn says a French court has frozen 20 residential properties worth more than 20 million euros belonging to the Indian government. In mid-May this year, the Scottish oil explorer had attempted to attach Air India’s assets in the US.
Should Cairn get possession of the properties in Paris, India’s image as an investment destination would be tarnished. Rather than continuing to fight the case in multiple jurisdictions—in which the arbitration ruling is enforceable—and spending more time and resources, the government should accept the payable amount of $1.7 billion and move on. In March this year, the government had filed an application to set aside the December 2020 international arbitral award. The ruling by the Permanent Court of Arbitration (PCA) had declared the Indian government’s Rs 10,247 crore tax demand from Cairn Energy, inconsistent with the India-UK bilateral investment treaty. The PCA directed New Delhi to permanently withdraw the demand. The dispute has its origins in Cairn’s reorganisation of its oilfields in 2016.
The rejigging was done with the permission from the FIPB, ahead of its Indian IPO, and there was no change in the ultimate beneficiary ownership. The taxman, however, contended these transactions were taxable because they involved the indirect transfer of underlying immovable property, including the natural resources assets. They claimed the re-organisation was tax-avoidant. In 2012, a retrospective amendment was made to Section 9(1)(i) of the IT Act, under the watch of the then finance minister Pranab Mukherjee, which allowed the government to levy a tax on M&A deals involving overseas companies with business assets in India. The changes effectively meant that any income accruing or arising outside India due to a business connection in India will be deemed to accrue or arise in India and would be taxable for all assessees irrespective of their residential status. The amendment was first used to levy a tax and penalty on Vodafone Plc on its purchase of a 67% stake in Hutchsion-Essar in India. Later, in 2014, the taxman used this amendment to demand capital gains tax from Cairn Energy.
The PCA found the taxman’s immovable property argument an afterthought, pointing out that the Indian government had been fully aware of the 2006 transactions but had not alluded to them being eligible for tax. The government must be willing to accept the arbitration’s rulings, in the Cairn case as also in other cases where it has received an unfavourable verdict. Not doing so sets a bad precedent and will discourage global corporations from investing in India. Simply lowering the corporation tax rate or offering incentives will not convince global investors that India is the place to set up shop; they need to be sure rules and regulations will be fair and contracts will be honoured. This government had promised not to be adversarial on tax matters, and it must live up to that promise.