Cairn tax ruling

  • IASbaba
  • March 15, 2021
  • 0
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  • GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
  • GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation

Cairn tax ruling

Context: In December 2020, a three-member tribunal at the Permanent Court of Arbitration in the Netherlands ruled against India in its long-running tax dispute with the U.K.-based oil and gas company Cairn Energy Plc and a subsidiary, Cairn UK Holdings Ltd. The tribunal ordered India to pay about $1.4 billion to the company. 

Action by Cairn:

  • Cairn Energy has successfully moved courts in five countries- The Netherlands, France, Canada, USA and UK, to recognise its claim as per the arbitration award. 
  • Such a recognition by courts opens the door for Cairn Energy to seize assets of the Indian government in these jurisdictions by way of enforcing its claim, in case the latter doesn’t pay its dues.

What is the case about?

  • The year in reference, 2006-07, was one in which big corporate changes and developments took place in Cairn Energy. 
  • It was the year in which it not only undertook a corporate reorganisation, but also floated an Indian subsidiary, Cairn India, which in early 2007 got listed on the Indian bourses. 
  • Through the corporate reorganisation process, Cairn Energy had transferred all of its India assets, which were until then held by nine subsidiaries in various countries, to the newly-formed Cairn India.
  • But the tax authorities claimed that in the process of this reorganisation, Cairn Energy had made capital gains worth ₹24,500 crore. This, the department asserted, was the basis of the tax demand of 1.6 billions USD.
  • In 2011, the U.K.-based Vedanta Resources bought a nearly 60% stake in Cairn India. In fact, four years after this, Cairn India received a tax notice for not withholding tax for the gains ascribed to its former parent company.

What happened after the tax claims in the Cairn Energy dispute?

  • After receiving a draft assessment order from the tax authorities, Cairn UK Holdings Ltd. appealed before the Income Tax Appellate Tribunal. The tribunal, while providing the company relief from back-dated interest demands, however, upheld the main tax demand.
  • The company had initiated proceedings of arbitration under the U.K.-India bilateral investment treaty. 
  • But during this time, “the government sold Cairn’s almost 5% holding in Vedanta Ltd” (the residual stake the firm owned after selling Cairn India), “seized dividends totalling ₹1,140 crore due to it from those shareholdings”, and “set off a ₹1,590-crore tax refund against the demand”.

What was the main argument of Cairn Energy during the arbitration?

  • The claimants, Cairn Energy and Cairn UK Holdings, argued that till the amendment was made to tax retrospectively in 2012, there was no tax on indirect transfers (transfer by a non-resident of shares in non-Indian companies which indirectly held assets in India). 
  • They also said the government had approved the 2006 reorganisation. 
  • The application of the 2012 amendments, they alleged, constituted manifest breaches of the U.K.-India bilateral investment treaty.

What was India’s defence during the arbitration?

  • India’s counter to the main charge of Cairn Energy was that its 2006 transactions were taxable irrespective of the 2012 amendments.
  • It argued that “Indian law has long permitted taxation where a transaction has a strong economic nexus with India”. 
  • It said even if it is retrospective, it is “valid and binding applying the longstanding constitutional, legislative and legal framework in which the claimants have invested”.

What did the arbitration tribunal rule?

  • The tribunal said the tax demand violated the U.K.-India bilateral investment treaty. The tribunal said India “failed to accord Cairn Energy’s investments fair and equitable treatment” under the bilateral protection pact it had with the United Kingdom.
  • It also ordered India to compensate Cairn Energy and its subsidiary for “the total harm suffered” as a result of the breaches of the treaty.

What next?

It has been reported in the media that India will appeal against the tribunal’s decision.

Connecting the dots:

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