Indian government loses retrospective tax case against Cairn Energy: Know all about it!

The Indian government has lost another retrospective taxation case against Cairn Energy Plc, after Vodafone Group PLC.

The Permanent Court of Arbitration (PCA) in the Hague unanimously ruled in favour of Cairn Energy stating that the Indian government failed to uphold its obligations under the India-UK bilateral investment treaty and international laws in seeking tax payments worth Rs 10,250 crore from the company for its business reorganisation

The arbitration tribunal awarded Cairn damages worth $1.2 billion plus interest and costs. The total damages have been estimated to be around $1.4 billion for the government.

The Case: Key Highlights

•The Cairn Energy case dates back to 2006-2007, when as a part of reorganisation, Cairn UK transferred shares of Cairn India Holdings to Cairn India.

•The company faced a tax probe eight years after in 2014 after the IPO-related reorganisation.

•The income tax department raised a demand of capital gains tax on Cairn UK amounting to $2.74 billion. The firm disputed the demand and the matter was heard by the I-T Appellate Tribunal and then the Delhi High Court.

•Though 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 had sold majority of its India business, Cairn India, to Vedanta.

•The income tax department, however, did not allow Cairn UK to sell 10 percent and attached Cairn India shares as well as dividends that the company paid to its parent.

•The tax authorities had claimed to have identified unassessed taxable income resulting from the intra-group share transfers undertaken in 2006 in preparation for the IPO.

•The notification referred to retrospective Indian tax legislation that was enacted in 2012, which the tax department had sought to apply to the 2006 transactions.

•The centre had taken action against Cairn Energy to recover the tax liability by selling the company’s 5 percent holding in Vedanta and seizing dividends worth Rs 1,140 due to it and setting off Rs 1,590 crore tax refund against the demand.

•Cairn Energy claimed that it suffered a loss worth $1 billion for a transaction that had been approved by the Foreign Investment Promotion Board, which also had the revenue secretary as its member.

India’s response

The Union Finance Ministry said in a statement that the centre is currently studying the award and all its aspects in consultation with its counsel. After these consultations, the government will consider all its options and take a decision on the further course of action, including legal remedies before appropriate forum.

What will happen if India does not pay the damages?

In case the centre fails to pay the amount, Cairn Energy PLC can approach courts in countries such as UK to seize any property owned by the Indian government to recover the money.

Background

The latest ruling is similar to the Vodafone case, which had led to a retrospective amendment of the law by the then finance minister Pranab Mukherjee in 2012.

The Indian Government had lost a similar case relating to Vodafone Group PLC three months ago where the Indian tax authorities had sought payment through a clarificatory amendment implemented retrospectively for the company’s acquisition of 67 percent stake from Hutch.

Though the deal had involved two overseas entities, which escaped tax, the Indian government had insisted that tax was due since the underlying assets were in India.