Cairn dispute: Centre says tax rows can't be settled in global arbitration

India has stuck to its position that non-compliance with tax laws is not covered under international treaties, in its recent response to UK-based energy giant Cairn's arguments in an international arbitration.

Besides, the government has argued, the tax department in its demand on Cairn had enforced the law as applicable on that date. The controversial retrospective amendments to the Income Tax (I-T) Act, it says, were only clarificatory in nature.

Cairn Plc had initiated arbitration in 2015 at The Hague in Netherlands against India under our bilateral investment promotion and protection treaty with the UK government. This was on the Rs 28,000-odd crore tax demand (including interest) raised by Delhi over non-payment of capital gains tax on a transfer of assets within the group.

"We have taken a stand that an international tribunal is not the jurisdiction for tax matters, since non-compliance is not covered under international treaties," said a government official.

India has also raised the point that the tax department applied the law as it stood on the day. "Cairn cannot claim that they didn't know the law. They took money out of the country," said another official in the know.

In its petition filed on September 22, 2015, Cairn had requested the arbitral tribunal to render an award declaring India had violated its obligations under the treaty and international law. It had contended that India has failed to accord Cairn's investment fair and equitable treatment, and impaired these through unreasonable and discriminatory measures, in violation of the treaty.

The I-T department contended Cairn UK made a capital gain of Rs 24,503.5 crore. Before the Cairn India Initial Public Offer (IPO) of equity, 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, 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 per cent of the shares in Cairn India were issued to Cairn UK Holdings. Hence, Cairn Energy, through Cairn UK Holdings, held 69 per cent 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 per cent. 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; it recently agreed to lift that freeze.

The company has also said the government had expropriated Cairn's investment in violation of the Treaty, by illegally attaching its equity shares in Cairn India, as well as any receivables by Cairn from the Indian entity.

The I-T Tax Appellate Tribunal (ITAT) has upheld the department's capital gains tax demand of Rs 10,247 crore under the retrospective amendment to the law. ITAT, however, gave relief on the interest amount demanded on the sum. "The ITAT judgement will bolster our stand in the international arbitration," said an official.

Final hearings on the arbitration matter are likely in January 2018. Cairn has sought compensation for breaching of the treaty by India for an amount equal to the value of Cairn's shares in Cairn India at the time of the attachment (approximately $1 billion), subject to further adjustment, in a freely convertible currency accepted by Cairn, plus interest.

The arbitration panel is being chaired by a Laurent Levy, with two others appointed by either party, Stanimir Alexandrov and Christopher Thomas.