Cairn tax case: FinMin to study arbitration award before taking a decision

Finance Ministry on Wednesday said that it would study the award given in favour of Cairn Energy PLC and Cairn UK Holding Limited in an international tax arbitration proceeding.

The tax dispute involves $1.6 billion.

“The Government will be studying the award and all its aspects carefully in consultation with its counsels. After such consultations, the Government will consider all options and make a decision on the further course of action, including legal remedies before appropriate fora,” a statement issued by the Finance Ministry said.

Cairn commenced international arbitration proceedings against the Government of India under the UK India Bilateral Investment Treaty in March 2015. The arbitration (the agreed method of Treaty dispute resolution) intended to determine if India breached its obligations under the Treaty to protect Cairn’s investments in India by retroactively applying a newly enacted capital gains tax law to an internal corporate reorganisation undertaken in 2006.

Cairn argued the retroactive application of a newly enacted law is a breach by India of its obligations under the Treaty to treat Cairn and its investments fairly and equitably and refrain from unlawfully expropriating Cairn’s assets. The matter was placed before the international arbitration panel comprising Laurént Levy (Chairman), Staminir Alexandrov and J.Christopher Thomas QC. The merits hearing took place on 20-31 August 2018 in the Hague, with a final hearing in Paris in December 2018. The Arbitral Tribunal issued an award on December 22.

What Cairn wants

According to Cairn, it is seeking full restitution for losses resulting from: the expropriation of its investments in India in 2014, continued attempts to enforce retrospective tax measures and the failure to treat the Company and its investments fairly and equitably. It also said it is not claiming for any form of special, punitive or consequential losses; the only damages that are equal to the value of the Group’s residual shareholding in CIL (Cairn India Limited) which was lost when the Income Tax Department (IITD seized it and subsequently sold it (retaining the proceeds), plus a further tax refund due to Cairn in an unrelated matter which has was also seized by the IITD, amounting to approximately Rs 10570 Crore (US$1.4 billion).

According to the company, it has legal advice confirming that the maximum amount that could ultimately be recovered from Cairn by the IITD is limited to the value of Cairn UK Holdings Limited (CUHL’s) assets, principally the ordinary and preference shares in VL, almost all of which have already been sold and/or redeemed, plus the seized dividends and tax refunds from 2009 and 2011.

Expert’s Take

Rakesh Nangia, Chairman at Nangia Andersen India, said that India had seized dividend, tax refund and shares to recover the dues partly Cairn’s tax dispute. The international arbitration tribunal ruled against the Indian Government and asked them to repay the funds withheld and Cairn’s interest, which shall be approximately ₹8,000 crore.

Interestingly, today is also the deadline for India to appeal against Vodafone’s arbitral award. Since this is the second case where India has lost an international tax arbitration proceeding, if India chooses to appeal against Vodafone arbitral award, keeping consistency, they will appeal in Cairn’s case too.

“It shall be interesting to understand the difference between ‘tax dispute’ and ‘tax-related investment dispute’, which is the Arbitration court’s ground while stating that Cairn’s tax issue is not a tax dispute, but an investment dispute, and hence gets covered by the BIT,” he said.