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

In a major setback, India, three months after losing Vodafone arbitration case, has lost another arbitration case related to a tax dispute to the UK oil major Cairn Energy Plc. The international arbitration tribunal, in a verdict that came on Tuesday night, has asked India to pay Rs 8,000 crore as damages to Cairn.

The winning of the international arbitration case has ended one of the most high-profile disputes in India, Reuters reported, citing sources that India has lost the case. Meanwhile, Cairn has not come out with any official statement on the matter yet.

After the verdict, the government will have to pay the British firm Rs 8,000 crore to reverse the dividend and tax refund it ceased and shares it sold to recover part of the tax demand.

The tribunal, which had completed main court hearings in December 2018, was earlier supposed to give an award by February 2019, which later was delated to March 2019, then 2019-end and then to 2020. The international arbitration tribunal has reportedly concluded that the Cairn tax issue does  not amount to "tax dispute" but a "tax-related investment" dispute, which is why it falls under its jurisdiction. It said India's tax demand from Cairn is not valid and amounts to a breach of fair treatment under the bilateral investment protection pact.

Also read: Vodafone arbitration award: Issue discussed with PM Modi; Centre may challenge case

In September, the government had lost a high-profile international tax arbitration case against Vodafone Plc after an international arbitration court ruled the Indian government, seeking Rs 22,100 crore in taxes from telecom giant Vodafone using retrospective legislation, was in "breach of the guarantee of fair and equitable treatment" under the bilateral investment protection pact between India and the Netherlands.

Meanwhile, the government is also planning to challenge the Vodafone arbitration award verdict. The matter is being discussed at the highest level, including with Prime Minister Narendra Modi, and the government may soon go ahead with challenging the award at the Singapore appellate tribunal. 

Also read: Centre may be waiting for Cairn arbitration award to decide on Vodafone appeal: report

The tax arbitration case

Cairn Energy, which gave the country its biggest oil discovery, received a notice from the income tax department in January 2014, requesting information related to the group reorganisation done in 2006.

Alongside, the department attached the company's 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 the company 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 PTI inputs