Govt to join Cairn tax arbitration; to appoint arbitrator soon

The government has decided to join the arbitration initiated by British oil explorer Cairn Energy plc over a Rs 10,247 crore tax demand and will soon appoint its arbitrator.
This follows Cairn, which had on March 10 slapped an arbitration notice against the tax being raised on a 2006 internal business reorganisation, moving The Hague-based International Court of Justice seeking appointment of an arbitrator on behalf of the Indian government.
In response, the Finance Ministry has conveyed to Cairn its intention to join the arbitration and would soon appoint an arbitrator, sources privy to the development said.
It has however made it clear that such an appointment would be without prejudice to the government's firm view that the tax dispute does not fall within the scope of the India-UK Bilateral Investment Protection Agreement.

Cairn had in the notice cited the breach of Treaty obligation of protecting its investment in India by retroactively applying a newly enacted capital gains tax law to
an internal corporate reorganisation undertaken in 2006.

It had on April 2 named former Bulgarian minister and lawyer Stanimir A Alexandrov as its arbitrator in the matter and asked government to name its arbitrator.
The two arbitrators were to then appoint a third neutral judge who will preside over the three-member panel to adjudicate applicability of capital gains.
Sources said Cairn had used a provision under the Treaty to seek appointment of an arbitrator on behalf of Indian government.

The Treaty provides "if the necessary appointments are not made with the period specified (six months), either party may, in the absence of any other agreement, request the President of the International Court of Justice to make the necessary appointment."
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. But it has been barred by the I-T Department from selling this stake.

The company says 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, it says.