Background Back in 2006, Cairn UK had transferred assets of Cairn India Holdings to Cairn India as a part of their reorganisation process. Cairn India was then listed on Indian stock exchange to raise money from Indian markets on the basis of these assets. Cairn made capital gains worth Rs. 24,500 crores in this process. This transaction went unnoticed until a similar transaction took place between Vodafone & Hutchinson which brough about amendments in retrospective taxation policy. The government introduced retrospective tax amendment stating that any capital gains resulting from transfer of shares from foreign entity whose assets were located in India were taxable retrospectively from 1962. Under this amendment, Cairn was now liable to pay Rs. 10,247 crores as capital gains tax. The Dispute In 2011, Vedanta Resources had completed 90.2% of acquisition of Cairn India. However, the Indian tax authorities held back transfer of 9.8% of Cairn’s stake to Vedanta Resources citing pending taxation issues. It then started selling these shares as part of its efforts to recover its dues. It also withheld tax refunds amounting to $222.8 million due to Cairn UK in another matter, seized dividends amounting to $159.8 million and seized proceeds due to the company from redemption of preference shares as part of its efforts to recover the dues. Cairn energy decided to retaliate by filing an arbitration case against India at the Income Tax Appellate Tribunal (ITAT) and then at High Court, in 2015. Cairn lost the case at ITAT whereas the case has been pending at High Court for years now. They approached the Permanent Court of Arbitration (PCA) at Hague to challenge the amendment of the tax code violating fair and equitable treatment assured under the India-UK Bilateral Investment Treaty (BIT). In December 2020, the PCA tribunal ruled in favour of Cairn Energy stating “Tax demand against the claimants (Cairn Energy Plc and Cairn UK Holdings Limited) in respect of AY (assessment year) 2007-08 is inconsistent with the (India-UK bilateral) treaty and the claimants are relieved from any obligation to pay it and orders the respondent (Indian government) to neutralise the continuing effect of the demand by permanently withdrawing the demand”. The PCA tribunal awarded Cairn US$1.2 billion in compensation that India was liable to pay. The government of India appealed against the arbitration award stating that the award questions India’s sovereign right to levy taxes. This forced Cairn to seize Indian assets overseas to recover the amount. It held Air India Ltd liable for the arbitration award and seized all the assets belonging to the Indian Government in Paris. While Cairn had filed petitions in several other countries to seize Indian assets, it is now looking to settle the dispute with the Indian government. The retrospective taxation is one of the standard practices followed globally by other countries such as US, UK, the Netherlands, Australia, Canada, Belgium, Germany. However while exercising these laws, a fair and equitable treatment must be given to the investors. The Indian government should not have enforced the tax law on the transactions taken place several decades ago. This move portrays India negatively in front of investors on the global platform. It can hamper international business relations and reduce FDI and FII inflows, affecting the Indian economy adversely. Said that, the Indian Government has passed a bill to scrap the tax amendment which retrospectively levied capital gains tax on companies for indirect transfer of assets, made in 2012. The decision will improve India’s reputation as it brings stability in tax jurisdiction and litigation. Thank you.
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