The BJP, however, is in government today, and all indications are it will challenge the Cairn ruling since, unlike in the Vodafone case, the government has to shell out over $1.4 bn including interest as well as costs of the litigation.
When the share transfers – between the Cairn companies, which were related parties – were examined by a transfer pricing officer (TPO), the issue of taxes was never raised either.
Had the BJP not come to power in 2014, and then again in 2019, chances are it would have been celebrating the global arbitration awards in the Vodafone and the Cairn Energy cases – Vodafone’s award was in September, Cairn’s today – and said the global legal community had ruled against the UPA’s retrospective tax; indeed, a big part of the BJP’s campaign in 2014 was to stop tax-terror that included cases like Vodafone and Cairn. The BJP, however, is in government today, and all indications are it will challenge the Cairn ruling since, unlike in the Vodafone case, the government has to shell out over $1.4 bn including interest as well as costs of the litigation.
Ideally, the government should accept both awards since not only does appealing them show that India has no respect for global arbitration awards, its then finance minister Arun Jaitley had repeatedly said he would accept what the courts – this includes arbitration panels – ruled in the case of the retrospective tax cases where a legal challenge had already been mounted. And while it appears that the government will have to pay $1.4 bn+ while it has to pay virtually nothing in the Vodafone case, keep in mind the $1.4 bn is money the taxman has, in the past, taken from Cairn; so, the taxman is actually just being asked to return what has been confiscated, nothing else. This includes $1bn worth of Cairn’s shares as well as the dividend Vedanta had to pay Cairn. The taxman who convinced Jaitley that confiscating – and selling – Cairn’s assets even prior to winning the case clearly has a lot to answer for.
On the face of things, both the Cairn and Vodafone cases look similar as both are about the unwarranted use of the retrospective tax and, in both cases, even the arbitrator appointed by the Indian government ruled against its taxman. Yet, in a fundamental sense, they are quite different since, unlike the Vodafone case where $11.1 bn was paid out to Hutchinson Telecom for its India business – the taxman said Vodafone should have deducted TDS on the amount – there were no cash flows in the Cairn deal.
The Cairn case pertains to its IPO. Apart from the fact that IPO proceeds are never taxed, Cairn could have done the IPO overseas; at that point, the various Cairn subsidiaries that held the India assets, like the Rajasthan oilfields, were located abroad. Cairn, however, chose to do the IPO in India and when it submitted details of the corporate restructuring between various Cairn companies and its Indian subsidiary to the Foreign Investment Promotion Board – a finance ministry Secretary is part of FIPB – the issue of taxes being due was never raised. When the share transfers – between the Cairn companies, which were related parties – were examined by a transfer pricing officer (TPO), the issue of taxes was never raised either.
In 2009 and 2011, Cairn sold its stake to Petronas and Vedanta and paid around Rs 3,700 crore of capital gains taxes on these transactions; the same 2006 transactions were examined once again and, even then, no demand was made for taxes. It was only after the retrospective tax legislation was introduced in 2012 that the taxman decided to go after Cairn under that.
What makes Cairn different from Vodafone is also the timing of the tax demand. Unlike Vodafone where the tax demand was reinstated after the retrospective tax legislation was passed in 2012, the Cairn tax demand was issued nearly a year after the BJP came to power; as it happens, the tax notice was sent on March 10, 2015, the birthday of Cairn CEO Simon Thomson! So, when the BJP government was saying it would be trying to fix the UPA’s retrospective tax issue, and the solution found was to accept court/tribunal judgments/rulings on the cases in court, Cairn had not been sent a tax notice. If the BJP had wanted, the case could easily have been sent to a panel for examination. As it happens, some months later, the government set up the Justice AP Shah committee to look at the issue of levying MAT on FIIs and the mandate of the panel was extended to hear other tax cases; at that time, the government said ‘active cases’ would not be considered, but the fact is that Cairn would not have been an ‘active’ case had the panel been set up a few months earlier.
Though no decision has been taken on whether to challenge the Cairn award – the Vodafone one will also have to be challenged if Cairn is – if past is precedent, it most certainly will be challenged, though how the courts react is not clear. Just a few months ago, the Supreme Court turned down a government appeal to stop a $476-mn award that Vedanta and Videocon had won way back in January 2011. The Reliance Industries award – it won this in 2016 – in the Panna Mukta Tapti case is still pending in court, as is the 2018 Reliance ONGC one where the government was unable to convince the arbitration panel that Reliance had to pay $1.6-bn in damages for ‘stealing’ natural gas from ONGC.
While the government appealed the $672-mn arbitration award that Devas Multimedia won against Isro-arm Antrix Corporation in 2016, 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. Indeed, in the Tata Docomo award that the government challenged – even though it was not a party to the case – on grounds the agreement signed by Tata and Docomo violated Fema rules, the Delhi high court said the arbitration award would have to be honoured even if this meant the Tatas paid a fine for violating Fema rules. In the case of the government’s canalising agency Nafed versus Swiss firm Alimenta SA, though, SC didn’t allow the 1989 global arbitration award to be implemented earlier this year as it felt it violated India’s public policy.
The taxman, who is the villain of the piece in both Cairn and Vodafone, though, probably got it right in the case of Swiss firm Xstrata’s arbitration award against Delhi-based Dalmia Bharat. The Delhi High Court ruled against the tax department – last year – wanting to tax the award as a ‘windfall gain’; the Section of the DTAA between India and Switzerland cited by the taxman talks of income from lotteries, races, card games, gambling, betting … Unknowingly, however, was the taxman admitting than successfully enforcing arbitration awards in India is really a matter of luck, a lottery?