Cairn Energy wins the Tax Arbitration, Indian government directed to pays Rs.8000 Crore

Cairn Energy wins the Tax Arbitration, Indian government directed to pays Rs.8000 Crore

The Indian government has lost arbitration to oil major giant Cairn under the retrospective tax amendment to the law in a case pertaining to a Rs. 24,500 crore tax demand on capital gains made by the oil major in reorganisation of its India business in 2006-07.

India has been asked to pay damages worth Rs. 8,000 crore to the UK oil major. The judges of the international Arbitration Tribunal ruled that India's retrospective tax demand breached the U.K.- India bilateral investment protection treaty.

The tribunal ruled that the tax claim was not a valid demand and asked the government to repay the funds along with interest to Cairn. India had seized dividend, tax refund and shares to partly recover the dues.

The International Court of Justice at The Hague has maintained that the Cairn tax issue is not a tax dispute, but a tax related investment dispute. It has ruled that India's demand in past taxes was in breach of fair treatment under a bilateral investment protection pact.

The Indian government has been asked to pay Cairn Rs 8,000 crore in damages, which include the shares attached by the Income Tax Department in January 2014 and sold in 2018 to partially recover the tax dues.

Cairn Energy held 4.95% stake in mining major Vedanta Ltd which the Income Tax Department attached after issuing a tax demand to the British firm in 2014. The government has been asked to pay damages at the share value of Rs. 330 in 2014 instead of the Rs. 220-240 per share price on which it was actually sold by the Income-Tax Department in 2018, in tranches.

The damages also include Rs. 1,590 crore of tax refund due to the British company besides the legal fees.

Cairn had lost case at Income tax appellate tribunal (ITAT) and the matter is before High Court over the valuation of capital gains and not the constitutionality of the tax demand.

The tax demand by India was in respect of Cairn UK transferring shares of Cairn India Holdings to Cairn India, as part of an internal group reorganisation in 2006-07. This gave rise to different interpretations on whether the UK-based company made capital gains, preceding an initial public offering (IPO) of shares by Cairn India.

The Income Tax department had contended that Cairn UK made a capital gain of Rs. 24,503.5 crore. Before the Cairn India IPO, 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.

According to Cairn Energy website, the oil major received the tax claim from Indian authorities in March 2015 over the restructuring carried out in 2006 while preparing for the IPO of Cairn India. The tax authorities had seized 10% of Cairn India's shares, then valued at about $1 billion.

Later, in 2011, Cairn Energy sold Cairn India to mining Anil Agarwal's Vedanta Group, barring a minor stake of 9.8%. It wanted to sell the residual stake as well but was barred by the Income Tax department from doing so. The government also froze payment of dividend by Cairn India to Cairn Energy but it recently agreed to lift that freeze.