An international arbitration tribunal has ruled in favor of Cairn Energy of Britain in the case of taxation from a prior date. The tribunal has ordered India to return $ 1.4 billion to the British company. The Indian government has indicated that it may challenge the decision. The three-member tribunal unanimously ordered that the claim of Rs 10,247 crore as retrospective tax by the Government of India on Cairn’s internal reorganization of its Indian business in 2006-07 is not valid. One member of the Authority was nominated by the Government of India.
It said in the 582-page order, “India failed to treat the claimants (Cairn Energy) fairly under the bilateral investment protection treaty”. The tribunal also asked the Indian government to Avoid tax demand and return to Cairn the amount taken from the sale of shares for dividends, withholding of tax refund and recovery of arrears. According to the order, the government has been asked to compensate Cairn for the loss with interest. Also, the cost of arbitration proceedings has also been asked to be paid.
While the order does not provide for challenge or appeal, the government has said that it will study the arbitration order and consider various options and decide on further proceedings, including legal remedies, before the appropriate forum. According to people watching the case, if the verdict is not followed, the Cairn can approach the courts of countries such as Britain for confiscating India’s assets abroad using the order of the Arbitration Tribunal for withdrawal of funds.
Confirming the decision, Cairn said in a statement, “The tribunal has given a ruling in favor of its claim against the Indian government … under which India was paid interest and legal proceedings with damages of US $ 1.2 billion.” According to sources, the government of India will have to pay a total of $ 1.4 billion (about Rs 10,500 crore), adding $ 200 million interest and $ 22 million in arbitration proceedings. This is the second setback for the government in the last three months. Earlier in September, an international arbitration tribunal ruled against the tax imposed by India on Vodafone Group with prior effect.
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However, Cairn was the only company against which the government took action to collect tax with prior effect. While the case was pending in the tribunal, the government sold Cairn’s five per cent stake in Vedanta Ltd, forfeited a dividend of around Rs 1,140 crore and a tax refund of about Rs 1,590 crore. Apart from Cairn Energy, the government made a similar tax demand from its subsidiary Cairn India (now part of Vedanta Limited). Cairn India has also challenged this demand through a separate arbitration suit.
The government has not taken any step so far in the case of Vodafone. On the whole matter, the Finance Ministry said in a statement that the government will study the decision and all aspects of it will be consulted with lawyers. “After this consultation, the government will consider all options and decide on further course of action, including legal action at the appropriate stage,” the statement said. The decision has not been challenged and a decision can be taken soon after the Cairn arbitration decision.
