Cairn Energy Taxation Issue – UPSC GS3

The Indian government has lost an international arbitration case to energy giant Cairn Plc over the retrospective levy of taxes, and has been asked to pay damages worth RS. 8000 crore to the UK firm.

The case pertains to the tax demand related to an alleged Rs24,500 crore worth capital gains Cairns made in 2006 while transferring all its shares of Cairn India Holdings to a new company, Cairn India, and got it listed on the stock exchanges.

However, Cairn argued the retroactive application of a newly enacted law is a breach by India of its obligations under the Treaty [UK-India Bilateral Investment Treaty] to treat Cairn and its investments fairly and equitably and refrain from unlawfully expropriating Cairn’s assets.

Owing to different interpretations of capital gains, the company refused to pay the tax.

This prompted cases being filed at the Income Tax Appellate Tribunal (ITAT) and the High Court.

The Permanent Court of Arbitration at The Hague has maintained that the Cairn tax issue is not a tax dispute but a tax-related investment dispute and, hence, it falls under its jurisdiction.

India’s demand in past taxes was in breach of fair treatment under the UK-India Bilateral Investment Treaty.

The GOI was ordered to compensate for the total harm suffered together with interest and cost of arbitration.

The order does not contain a provision for challenge or appeal. Moreover, Cairn can use the arbitration award to approach courts in countries such as the UK to seize any property owned by India overseas to recover the money if the award is not honoured.

Cairn Energy has asked the Government of India to resolve the retrospective taxation case.

It has threatened to begin attaching Indian assets including bank accounts in different world capitals in case of non-resolution.

It has also cited clauses in the U.K.-India Bilateral Investment Treaty and the New York Convention to which India is a signatory.

United Nations diplomatic conference adopted this convention in 1958 and entered into force in 1959.

The Convention’s principal aim is that foreign and non-domestic arbitral awards will not be discriminated against. It obliges Parties to ensure such awards are recognized and generally capable of enforcement in their jurisdiction in the same way as domestic awards.