Blow to India, Cairn wins $1.2-b award in retrospective tax dispute

P Manoj New Delhi | Updated on December 23, 2020

GoI had sought ₹10,247 crore in retrospective taxes; this follows an international arbitration tribunal ruling in Sept against India levying retrospective taxes on Vodafone Group

British oil and gas explorer Cairn Energy Plc said it has won an arbitration tribunal award of $1.2 billion plus interest and costs against the Indian government on a tax dispute, in a second blow to the government in three months on the controversial retrospective tax levy.

Cairn initiated arbitration to fully recover losses 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.

Cairn sought ₹10,570 crore ($1.4 billion) in damages from the government to recoup the value of the Group’s residual shareholding in Cairn India Limited (CIL, since merged with Vedanta Limited), which was lost when the Income Tax Department 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 IT Department.

The arbitration tribunal panel, comprising Dr Laurént Levy (Chairman), Dr Staminir Alexandrov and J Christopher Thomas QC, issued an award on Tuesday  in Cairn’s favour.

Bilateral treaty

Cairn’s claim was brought under the terms of the UK-India Bilateral Investment Treaty and the proceedings were under the registry of the Permanent Court of Arbitration.

“The tribunal ruled unanimously that India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty and has awarded Cairn damages of $1.2 billion plus interest and costs, which now becomes payable,” Cairn’s said in a statement on Wednesday.

The arbitration (the agreed method of Treaty dispute resolution) was asked 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.

Breach of obligations

Cairn submitted that 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 to refrain from unlawfully expropriating Cairn’s investments.

The Treaty affords strong provisions to enforce a successful award and the decision of the Tribunal is final and binding on both parties.

In September, an international arbitration tribunal ruled against India levying retrospective taxes on the Vodafone Group.

The unexpected outcome of Cairn arbitration does not bode well for the Indian government that claims to increase the efficacy of ease of doing business in India and free trade, says Amit Vyas, Founder Partner at law firm Vertices Partners.

“Thus, the term “fair treatment” is wide and needs to be interpreted in consonance with the true letter and spirit of Indian laws and Bilateral Investment Pact, as both aim at protection of interest of investors and speedy resolution of disputes,” Vyas said.

“The Indian government may consider appealing against Cairn and Vodafone cases to ensure efficient and expeditious implementation of law and to prevent abuse of law,” Vyas added.

Published on December 23, 2020

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