Cairn arbitration case: Tribunal cites PM Modi, Jaitley to overturn India's tax demand

A three-member tribunal at the Permanent Court of Arbitration in The Hague cited statements by Prime Minister Narendra Modi and other BJP ministers, saying they pledged not to use 'retrospective taxation' to overturn Rs 10,247 crore tax demand from Cairn Energy Plc.

The 582-page order, accessed by news agency PTI, directed Indian Income Tax Department to return the value of Cairn shares sold, seized dividend, and withheld tax refunds in 2012.

The tribunal said Cairn Energy's India business reorganisation in 2006 before its listing on the stock exchanges was not "unlawful tax avoidance".

Ordering the Indian tax authorities to drop the tax demand, The Hague tribunal, which also included a member appointed by the Indian government, said before the 2014 General Elections, the BJP in its poll  manifesto "criticised the preceding government for having unleashed 'tax terrorism' and 'uncertainty', which 'negatively impact {ed} the investment climate."

Notably, after the BJP government was formed in 2014, late former finance minister Arun Jaitley had proposed forming a CBDT-supervised 'high-level committee' to scrutinise tax dispute cases that had emerged after the 2012 amendments.

Citing Jaitley's statements, the tribunal said: "Henceforth, all fresh cases arising out of the retrospective amendments of 2012 in respect of indirect transfers and coming to the notice of the Assessing Officers will be scrutinized by a High-Level Committee to be constituted by the CBDT before any action is initiated in such cases."

The tribunal also quoted PM Modi's statement, citing the Financial Times report, saying the government "will not resort to retrospective taxation; we are making our tax regime transparent, stable and predictable".

Also read: India loses tax arbitration case against Cairn; told to pay Rs 8,000 cr

The Cairn tax arbitration case

In a major setback for India after losing Vodafone arbitration case, the country lost another arbitration case related to a tax dispute to the UK oil major Cairn Energy Plc on December 22. The international arbitration tribunal has ordered the I-T Department to pay Rs 8,000 crore as damages to Cairn.

Cairn Energy, which gave the country its first biggest oil discovery, got its first I-T notice in January 2014 regarding information about the group reorganisation in 2006.

The department also attached its near 10 per cent shareholding in its erstwhile subsidiary, Cairn India. In March 2015, the tax department sought Rs 10,247 crore in taxes on alleged capital gains made by Cairn in the internal reorganisation.

Cairn Energy had in 2010-11 sold Cairn India to Vedanta. Following the merger of Cairn India and Vedanta in April 2017, the UK firm's shareholding in Cairn India was replaced by a shareholding of about 5 per cent in Vedanta issued together with preference shares.

In addition to attaching its shares in Vedanta, the tax department seized dividends totalling Rs 1,140 crore due to it from those shareholdings and set off a Rs 1,590-crore tax refund against the demand. Cairn Energy in 2015 initiated an international arbitration to challenge retrospective taxation.

With inputs from PTI

Also read: Will govt appeal against Cairn order? Response to Vodafone tangle holds clue