Now, Cairn demands $5.6 bn from govt

$1 bn as damages, $4.6 bn for tax demand, interest and penalty

Edinburgh-based Cairn Energy has spurned the Indian government's scheme for tax dispute resolution by December 31. The company has filed an arbitration claim which is about 18 per cent higher than the Rs 29,047 crore being sought by the government for a retrospective tax levy.

The claim has been made on two counts - damages of about $1 billion for the loss of value as a result of the tax demand and an additional $4.6 billion equivalent to the demand, interest and penalty, said a person close to the development.

A total claim of $5.6 billion has been made on the grounds that if the government continues with its proceedings, the company wants it to be compensated for the equivalent amount.

"The primary claim is for $1 billion, but the additional amount will arise if the government continues with the tax demand and the arbitration award does not lead to dropping of such demand," said the person.

Besides, in its 160-page statement of claims filed on June 28, 2016, the company has sought to prevent any future taxation on even the compensation amount by seeking additional money from the government for "offsetting any taxation of the compensation due" to it.

In response to a Business Standard query, the company said international arbitration proceedings, under the UK-India Investment Treaty, have commenced to settle the retrospective claim, which has been ongoing since January 2014. "Cairn has filed its Statement of Claim to the International arbitration panel," a Cairn Energy spokesperson said in an e-mail.

The government is taxing the company for a reorganisation it did before the listing Cairn India on the Indian stock market in 2006. Cairn India was carved out for management and operation of Indian assets of the parent, and any future business. In its Statement of Claim, Cairn said it would not have undertaken the reorganisation or entrusted its listing to the Indian markets if it had an inkling that India might change its source rule to impose capital gains tax on routine transfer of shares in non-Indian companies and retroactively seek to collect tax that would render the entire IPO transaction value destructive. "It would instead have created a different transactional structure and pursued an IPO on a UK exchange."

Amit Maheshwari, international tax expert with Ashok Maheshwary & Associates, said the revised model of Bilateral Investment Promotion and Protection Agreement (BIPA) proposed by India keeps tax disputes out of arbitration, which had been the Indian government's understanding till now. "However, Cairn invoked the existing BIPA to protect its interests. This would turn out to be an interesting case and would set a precedent for current and future disputes."

The government is required to file its Statement of Defence by November and evidential hearing is expected to commence in early 2017. Cairn has said it will abide by the arbitration panel's decision. The panel is chaired by Laurent Levy, who is joined by two party appointed arbitrators, Stanimir Alexandrov and Christopher Thomas.

"Cairn has had robust legal advice that the action of the government in seeking to apply tax retrospectively to the internal group reorganisation in 2006, and in freezing Cairn's assets in India, are a breach of the treaty, which protects against expropriation and ensures a fair and equitable investment environment for British investors in India," the company said.

In January 2014, Cairn received a notice from the Indian Income Tax Department requesting information relating the reorganisation. The I-T department provisionally attached the company's remaining 10 per cent shareholding in Cairn India, then valued about $1 billion. The value of Cairn Energy has since reduced by 40 per cent and international shareholders have suffered material losses, the company said. Its financial capacity to invest in oil and gas assets has been severely impacted with a subsequent 40 per cent cut in workforce, it added.

Another tax expert, who did not want to be named, said many companies have made such claims in contracts given by the government. The government made some claims and the company made counter claims. This is like pressuring the government to withdraw the tax, but it might not depress investor sentiments as Vodafone has made $3-4 billion investment in India, despite facing a similar tax claim from the government, the expert added.

WHAT THE 1994 AGREEMENT BETWEEN INDIA AND UK SAYS

Article 3: Promotion and protection of investment

• Contracting parties to create favourable conditions for investors of the other contracting party and admit them in accordance with their laws and policies
  

 

Investments made from the contracting party will be accorded fair and equitable treatment and enjoy full protection and security in the territory of the other contracting party
 

Each contracting party will observe any obligation they may have entered into with regard to investment made by investors of the other contracting party

Article 9: Settlement of disputes between an investor and host state

• The article elaborates on the procedure for dispute resolution and arbitration. This provision is available for only Article 3(3) of the treaty

Source: Ministry of finance