Explained: Issues in the Cairn Energy-govt dispute

The government has welcomed Cairn’s move to reach out for a resolution, however, it is of the view that any dispute resolution to be sought by Cairn will have to be “within the already existing laws”, the official said.

Cairn Energy CEO meets Finance Secretary

Cairn Energy Chief Executive Officer Simon Thomson met Finance Secretary Ajay Bhushan Pandey on Thursday to discuss the way forward with respect to the $1.2 billion (roughly Rs 8,000 crore) arbitration award by the Permanent Court of Arbitration (PCA) at The Hague in December 2020. The court had ruled that the Indian government’s retrospective tax demand on Cairn Energy was “in breach of the guarantee of fair and equitable treatment”, and against the India-UK bilateral treaty.

Thursday’s meeting, government officials and company executives said, was to find an amicable and “positive” solution to the retrospective taxation issue. Pandey was joined at the meeting by senior Finance Ministry officials such as Central Board of Direct Taxes chairman P C Mody.

While Thomson said before the meeting that Cairn Energy shareholders wanted a quick resolution, government officials have not yet decided whether to go for an out-of-court settlement or to challenge the arbitral award. The government has 90 days — until March — to challenge the award in a higher court in Singapore.

The government has hinted that the only possible solution for both parties to avoid further litigation was for Cairn Energy to agree to the government’s Vivad se Vishwas tax amnesty and dispute resolution mechanism.

What is the Cairn Energy-Indian government dispute all about?

The dispute stems from the much debated retrospective taxation issue. Fifteen years ago, in 2006-2007, Cairn UK had, as part of an internal rearrangement process, transferred shares of Cairn India Holdings to Cairn India. Income-Tax authorities then decided that since Cairn UK had made capital gains, it ought to pay capital gains tax up to Rs 24,500 crore.

The company interpreted Indian laws on capital gains differently, and refused to pay. Several rounds of litigation at the Income-Tax Appellate Tribunal (ITAT) and the High Court followed. Cairn lost the case at ITAT; a case on the valuation of capital gains is pending before Delhi High Court.

While Cairn Energy sold the majority of its India business, Cairn India, to mining giant Vedanta in 2011, income-tax authorities barred it from selling about 10 per cent, citing pending taxation issues. The payment of dividend by Cairn India to Cairn Energy was also frozen.

What had the Permanent Court of arbitration court say in its ruling?

In its judgment, the PCA at The Hague said the issue was not just related to tax, but was an investment-related dispute — and was therefore under the jurisdiction of the international arbitration court.

“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 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 three-member arbitration panel said in its judgment.

The arbitration tribunal also said that India must not make any more attempts to recover “the alleged tax liability or any interest and or penalties arising from this alleged liability through any other means”.