India loses Tax Arbitration Case against Cairn, asked to Pay Damages worth Rs. 8000 Crore
CEOInsights Team, 0
The damages awarded to Cairn include the shares attached by the income-tax (I-T) department in January 2014 and sold in 2018 to partially recover the tax dues. Cairn Energy had held a 4.95 percent stake in mining major Vedanta Ltd which the I-T department attached after issuing tax demand to the British firm in 2014. The government has been asked to pay damages at the share value of Rs. 330 as of 2014, instead of Rs. 220-240 apiece on which it was actually sold by the I-T department in 2018 in tranches. The compensation also includes Rs. 1,590 crore in tax refund due to the British company, besides the legal fees.
The verdict came on Tuesday night, barely three months after India lost arbitration to Vodafone Plc over the retrospective tax legislation amendment. The verdict has also noted the argument by the Edinburgh-based company that the tax demand came up after the Vodafone tax case, which was quashed by Indian courts. Apart from that, the Permanent Court of Arbitration at The Hague has stated 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, it said, was in breach of fair treatment under the UK-India Bilateral Investment Treaty.
The verdict came on Tuesday night, barely three months after India lost arbitration to Vodafone Plc over the retrospective tax legislation amendment
Reacting to the order, the government in a statement said it would be studying the award and all its aspects carefully in consultation with its counsel. “After such consultations, the government will consider all options and take a decision on further course of action, including legal remedies before appropriate fora,” it said.
The tax demand by India was in respect of Cairn UK transferring shares of Cairn India Holdings to Cairn India as part of an internal group reorganization in 2006-07. This gave rise to different interpretations on whether the UK-based company made capital gains, preceding an initial public offering (IPO) of shares by Cairn India. The I-T department had contended that Cairn UK made capital gains of Rs 24,503.5 crore.
Before the Cairn India IPO, the India operations of Cairn Energy were owned by a company called Cairn India Holdings-Cayman Island and its subsidiaries. Cairn India Holdings was a fully owned subsidiary of Cairn UK Holdings, in turn a fully owned subsidiary of Cairn Energy. At the time of the IPO, the ownership of the India assets was transferred from Cairn UK Holdings to a new company, Cairn India. In 2006, Cairn India acquired the entire share capital of Cairn India Holdings from Cairn UK Holdings. In exchange, 69 percent of the shares in Cairn India were issued to Cairn UK Holdings. Hence, Cairn Energy, through Cairn UK Holdings, held 69 percent in Cairn India. Later, in 2011, Cairn Energy sold Cairn India to mining billionaire Anil Agarwal’s Vedanta group, barring a minor stake of 9.8 percent. It wanted to sell the residual stake as well but was barred by the I-T department from doing so. The government also froze payment of dividend by Cairn India to Cairn Energy.