This article has been written by Akshay Shivshankar pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.

Introduction

Cairn India has been in the headlines for over a decade. In this post, we’ll look at why Cairn India Ltd is in the news and why the business went to the Permanent Court of Arbitration. We’ll also talk about how and why the Indian government failed to handle this matter, as well as the Vodafone case. This article seeks to explain everything concerning the cairn India Ltd. issue. Also, the government of India.

Cairn India is the country’s largest crude oil and gas explorer. The company discovered the largest onshore oil field in Rajasthan in 2004 and is currently working in Rajasthan, Andhra Pradesh, and Gujarat. Cairn India Limited was successfully listed on the BSE (Bombay Stock Exchange) in 2007, allowing Indian investors to participate in the company’s success. Cairn Energy sold its stake in Cairn India over the next decade, primarily to PETRONAS in 2009 and Vedanta in 2011.

The issue pertaining to the matter was over retrospective taxation which led the business to the international arbitration after certain efforts failed by the company in India. The issue of retrospective taxation first came to public attention when the Ministry of Finance’s Department of Revenue pursued what they called a “test case” against Vodafone, seeking Indirect tax transfers of shares in a non-Indian corporation. In January 2012, the Supreme Court of India unanimously ruled in favor of Vodafone, confirming that such transfers were not permissible under Indian law.

What is the dispute?

On March 16, 2012, less than two months after the Supreme Court unanimously rejected the Income Tax Department’s attempts to broaden the tax net in the Vodafone case, the Ministry of Finance introduced the Retrospective Amendment in the Finance Bill 2012. It stated, among other things, that shares in a non-Indian company are always deemed to be located in India if their value is derived substantially from underlying Indian assets. To effectively overturn the Supreme Court’s decision in Vodafone, the Finance Act of 2012 stated that the retrospective amendment would be deemed to have taken effect on the date of its enactment. 

Cairn Energy was preparing to sell its final stake in CIL in January 2014, eight years after the pre-IPO group reorganization. The Indian Income Tax Department then decided to conduct a retrospective tax investigation into the company. 

As a result, Cairn was informed by the India Income Tax Department (IITD) that it was not permitted to sell its remaining 10% stake in Cairn India Limited (CIL, which has since merged with Vedanta Limited). Following that, the IITD sold the majority of its holdings and received both the proceeds and dividend payments. The IITD claimed in the notification that it had discovered unassessed taxable income as a result of intra-Group share transfers carried out in 2006 in preparation for the IPO. The notification made reference to retrospective Indian tax legislation enacted in 2012, which the IITD was attempting to apply to the 2006 transactions.

Some key points which help to understand the concept:

1. Retrospective taxation: Looking back on something that happened in the past is what the term retrospective means. A tax is anything you pay to the government that is in addition to the base price of a good or service. As a result, the term retrospective tax refers to the payment of taxes on goods and services purchased in the past or income earned in the past. This could occur as a result of laws being amended or new taxation rules being implemented in an Economy. 
2. Vivad se Vishwas Bill, 2020: The Union Cabinet recently approved an amendment to the ‘Direct Tax Vivad se Vishwas Bill, 2020,’ broadening its scope to include litigation pending before various Debt Recovery Tribunals (DRTs).

• The amendment also applies to certain search and seizure cases in which the recovery is up to 5 crores.
• • As a result, the Bill in its current form allows taxpayers to settle cases before the Commissioner (Appeals), Income Tax Appellate Tribunals (ITATs), Debt Recovery Tribunals (DRTs), High Courts, and the Supreme Court. 
• The Direct Tax Vivad se Vishwas Bill, 2020 is similar to the ‘Sabka Vishwas Scheme,’ which was implemented in 2019 to reduce indirect tax litigation. It resulted in the resolution of over 1,89,000 cases.
• The Bill’s goal is to provide a simple and expeditious mechanism for resolving pending tax disputes involving direct taxes (Income Tax and Corporate Tax).
• The Bill’s goal is to provide a simple and expeditious mechanism for resolving pending tax disputes involving direct taxes (Income Tax and Corporate Tax).

Cairn India’s effort to settle the dispute

If the government agrees to enforce the award, Cairn Energy has offered to invest the entire award money in India, including the $1.4 billion principal and $500 million in interest. The government, on the other hand, is unlikely to accept the proposal, arguing that it would imply accepting the verdict, which it has appealed.

There is no way the proposal will be accepted by the government. The government has filed a formal appeal. Any solution must adhere to the legal framework. The government has asked them to participate in the Vivad Se Vishwas (VSV) scheme and settle the dispute by paying 50% of the disputed principal tax amount and receiving a waiver of interest and penalty. According to a government official, this would have resulted in an immediate refund of $300 million.

In fact, the government is still willing to settle the dispute by allowing the oil company to use the VSV direct tax dispute resolution scheme, which officially closed on March 31. The payment period ends on April 30.

India’s stand over the dispute

Cairn was awarded a victory over the Income Tax Department by the Permanent Court of Arbitration in The Hague. The Indian government, on the other hand, made no indication that it would comply with the decision. As a result, the case will be heard in Singapore, where the Indian government has also filed an appeal in the Vodafone case.

The company has also sought assistance from other countries. Cairn’s claim to the arbitration award has since been recognized by courts in five countries, including the United Kingdom and the United States. Nonetheless, the Indian government maintains its stance in the case. The government filed an appeal in The Hague in March against the arbitration decision in favor of Cairn Energy. The appeal was based on India’s sovereign right to tax an entity as well as the UK oil major’s tax evasion. Based on the appeal, the government has requested a stay of enforcement of Cairn’s award in a lower Dutch court, and it is also prepared to contest enforcement in at least eight other countries, including the United Kingdom, Canada, the United States, and France, are involved.

Vodafone dispute

The government is also embroiled in a similar dispute with Vodafone. This tax case dates back more than a decade when the country’s tax department issued a notice to Vodafone regarding capital gains tax, which it was required to withhold when it purchased Hutch’s India business in 2007.

Vodafone also claimed that the transaction was exempt from taxation in India. While the Supreme Court ruled against taxing Vodafone in 2012, a retrospective tax clause amended later that year overturned the top court’s decision. The Permanent Court of Arbitration at The Hague’s Singapore Seat ruled in 2020 against India’s retrospective tax demand of Rs 22,100 crore for capital gains and withholding tax levied on the telco in connection with a 2007 transaction. It stated that the demand was “in violation of the guarantee of fair and equitable treatment” that the company was entitled to for its investments in the country, and ordered the government to reimburse Vodafone for legal representation and assistance costs, as well as fees paid by the company to the arbitration court, in the amount of 4.3 million pounds.

Conclusion

According to the order, the government was ordered to compensate Cairn “for the total harm suffered,” as well as interest and arbitration costs. While there is no provision in the order for challenging or appealing the award, the government stated that it would study it and “will consider all options and make a decision on the next course of action, including legal remedies before appropriate fora.” According to sources familiar with the situation, Cairn can use the arbitration award to file a lawsuit in countries such as the United Kingdom. Cairn was the only company that the government took legal action against in order to recoup back taxes. During the arbitration, the government sold Cairn’s nearly 5% stake in Vedanta Ltd., seized dividends totaling 1,140 crores due to it from those shareholdings, and offset the demand with a tax refund of 1,590 crore. Aside from Cairn Energy, the government imposed a similar tax demand on Cairn India, the company’s former subsidiary (which is now part of Vedanta Ltd.). In a separate arbitration proceeding, Cairn India has also challenged the demand. The government took no such action in the case of Vodafone.

References

1. https://www.business-standard.com/article/companies/arbitration-case-cairn-energy-offers-to-invest-1-2-bn-if-india-relents-121041200028_1.html.
2. https://www.cairnenergy.com/media/2827/cairn-india-arbitration-background-international-december-2020.pdf.
3. https://www.internationaltaxreview.com/article/b1qxgfbk6tw80m/india-decides-to-fight-cairn-arbitration-decision.
4. https://jusmundi.com/en/document/decision/en-cairn-energy-plc-and-cairn-uk-holdings-limited-v-the-republic-of-india-final-award-wednesday-23rd-december-2020.
5. https://www.natlawreview.com/article/cairn-v-india-investment-treaty-arbitration
6. https://www.italaw.com/cases/5709.

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