Cairn names ex-Bulgarian minister arbitrator for tax dispute

According to sources, Cairn has communicated its decision on the arbitrator to the Finance Ministry

Cairn Energy of UK has named former Bulgarian minister and lawyer Stanimir A. Alexandrov as its arbitrator for resolution of the Rs 10,247-crore tax demand the Indian government had slapped on it using retrospective taxation.

Alexandrov, who was Vice Minister of Foreign Affairs of Bulgaria, is based out of Washington and is associated with law firm Sidley where he deals with international dispute resolution, including investor-state arbitration.

Sources said Cairn has communicated its decision on the arbitrator to the Finance Ministry which now has to appoint an arbitrator of its choice on a three-member arbitration panel that is to go into the tax dispute.

Once the government names its arbitrator, a neutral international judge will be appointed as presiding arbitrator.

Using the UK-India Investment Treaty, Cairn had in March filed a formal dispute notice against the tax demand raised on an internal business reorganisation seven years ago and sought an arbitration with the government to quickly resolve the dispute that is impinging on its investment plans.

The government till now has not said if it will join the arbitration, sources said.

Cairn had said the imposition of capital gains tax on transfer of its India assets to a new company, Cairn India in 2006, was not only contrary to relevant legal standards but unjust because it was an internal transaction and no shares or assets were sold to any third party to make any capital gains.

The internal reorganisation was fully disclosed to relevant agencies and ministries including Income Tax Department in 2006-07, the company had said, adding it would not have undertaken the internal reorganisation if it had received any indication that its purely internal transaction would be subject to capital gains tax.

Prior to the previous UPA government bringing a new law in 2012 to tax share transfer retrospectively, foreign firms -filing returns in their respective jurisdictions - were not required to file tax returns in India. Cairn Energy, being based outside India, too did not file returns.

The Income Tax Department says Cairn Energy allegedly made a capital gain of Rs 24,503.50 crore in 2006 while transferring all its India assets to a new company, Cairn India, and getting it listed on the stock exchanges.

Cairn Energy, which had in 2011 sold majority stake in its Indian unit to mining group Vedanta for USD 8.67 billion, still holds 9.8 per cent stake in Cairn India.

The I-T Department, in January last year, barred it from selling this stake.

In the Notice of Dispute filed under UK-India Investment Treaty, Cairn sought withdrawal of all notices, release of attached shares and payment of full compensation for any resulting damages sustained by it, including for the diminution in value of the attached shares (which have declined in value by hundreds of millions of US dollars since they were first attached).