Dispute Between Government of India and Cairn Energy PLC, UK

On July 8th Cairn PLC UK, claimed that they have France court order to attach Govt of India assets in Paris towards the arbitration award of 1.2 Billion USD that it won against GoI in December 2018.

Background of this arbitration, is basically a retrospective tax amendment that was brought in by the GoI in 2012 to override the Supreme Court verdict that favored Vodafone, once again a retrospective tax demand raised by GoI then.

Cairn India which is a listed company in BSE, discovered oil in Mangala Oil Fields, Rajasthan between 2004-07. Cairn UK Holdings Limited (a subsidiary of Cairn Energy), is the parent company of Cairn India. Cairn Energy restructured its operations in India and transferred ownership of its Mangala oil field in Rajasthan to Cairn India. As part of this restructuring, Cairn India acquired the entire share capital of Cairn India from Cairn UK Holdings.

Cairn Holdings claimed that this restructuring was purely a business reorganization and not aimed at tax avoidance, where as Income tax department viewed it differently, irrespective of the intention, the department opined that the capital gain realized by Cairn UK Holdings must be taxed in India.

Post 2012 verdict by Supreme Court favoring Vodafone, GoI amended the IT Act to retrospectively give effect to such international sale of Indian asset to attract Tax in India.

In 2011, Cairn India sold most of its stake to Vedanta Resources for 8.7 Billion USD. In 2014 January, Income tax department raised a demand for 1.4 billion USD as capital gains tax for its restructuring in 2006 and froze 10% of the shares from being transferred to Vedanta Resources for which Income tax department received dividend and subsequently sold the shares in the market to realize the unpaid tax dues.

Cairn UK filed a arbitration proceedings against GoI in the Court of Arbitration, Hague, which unanimously ruled in favour of Cairn UK and asked GoI to pay 1.2 Billion USD towards compensation. Cairn UK argued that the Bilateral Investment Treaties between UK and India provides the protection to investment made in India to receive a fair and equitable treatment. 

GoI has appealed in the Arbitration Appellate Court, Netherlands on the grounds that India being a sovereign country has rights to enact Income tax law and rules, the bilateral investment treaties can not prevent the sovereign nations from enacting the tax laws, more over Cairn UK has not paid tax towards the restructuring gains in any country and hence the capital gains realized must be taxed in India.

In the meantime, while Cairn PLC has been negotiating with GoI for amicable settlement, demanded that India withdraw the appeal against the arbitration award, but Cairn PLC filed arbitration realization suits in various countries to attach the GoI Properties so that they can force GoI to honor the award. Important Assets targeted by Cairn PLC is Air India that holds the assets in many countries including the aircrafts, but the embassies and other sovereign assets can not be attached by any court according to Vienna Agreement.

Its important to note how GoI will react, if they settle with Cairn PLC, then its accepting that the retrospective tax code change is flawed and even Vodafone will file for arbitration based on this.

Was the retrospective amendment made in 2012 fair to any business, in my humble opinion, this retrospective amendment should have been at least reversed to be effective from 2012 in later years, because in all fairness, the IT Act provided the loop hole and the companies made use of that loop hole to gain, it’s a penalty the govt must pay for leaving such wide hole in the law. Amending with retrospective effect, means that the country’s laws can’t be trusted and force the investment community to hesitate investing in the future.

Options available with GoI

1.    Settle Amicably with Cairn PLC, at the same time protect the Sovereignty of the nation, this is the best possible option available with the country

2.    Fight the case in the Appellate Court on the arbitration order, if the appellate court holds the arbitration award, then it’s going to be a humiliating affair for the country