Cairn to withdraw litigation; 7-year retro-tax dispute draws to a close

In a closure of seven year-long retrospective tax litigation, Cairn Energy on Wednesday announced settlement with India under the new legislation, which will see the UK oil major withdraw all international arbitration cases against the Indian government to avail a refund Rs 7900 crore collected as taxes previously.

With this, Cairn Energy will not seek enforcement of a $1.2 billion arbitration award plus interest it had won in December against India at The Hague.

Oil & gas major Vedanta, which had bought Cairn Energy’s erstwhile subsidiary Cairn India in 2011, is also likely to withdraw an arbitration it had filed in Singapore seeking around Rs 5,000 crore in damages from the government.

“Cairn is pleased to announce that it has entered into undertakings with the Government of India in order to participate in the scheme introduced by recent Indian legislation, the Taxation Laws (Amendment) Bill 2021 (the “Taxation Amendment Act”), allowing the refund of taxes previously collected from Cairn in India,” Cairn Energy said in a release on Wednesday.  

The case pertains to the Rs 24,500-crore tax demand (including interest and penalty) on capital gains made by the oil major in reorganising its India business in 2006-07. The Income-tax department had launched retrospective tax investigation transactions undertaken prior to that in 2014.

 After losing the case at The Hague in December and filing an appeal in March, India passed the Taxation Laws (Amendment) Act 2021 in Parliament in August, offering a settlement of the retrospective cases pertaining to the 2012 legislation on the offshore indirect transfer of Indian assets.

Cairn Energy will have to indemnify the Indian government against future claims in order to settle their retrospective tax cases, according to rules notified by the government in October to settle disputes arising from seeking back taxes.

“Subject to certain conditions, the Taxation Amendment Act nullifies the tax assessment originally levied against Cairn in January 2016 and orders the refund of INR 79bn (approximately US$1.06bn*) which was collected from Cairn in respect of that assessment,” said the Edinburgh-based company in the statement. In order to satisfy those conditions, Cairn will commence the filing of the necessary documentation under rule 11UF(3) of the Indian Income Tax Rules 1962(Rules) intimating the withdrawal, termination and/or discontinuance of various enforcement actions," Cairn Energy added.

Cairn would be required to withdraw its international arbitration award claim, interest and costs and to end all legal enforcement actions in order to be eligible for the refund under the terms of a new legislation. The company had registered the arbitration award in many jurisdictions, including the US, UK, Canada, Singapore, Mauritius, France and the Netherlands. It had even sought mortgage of government properties in Paris and sought claim on Air India as “the alter ego of the Indian state.

 Going by the timelines drawn in the rules, the refund will take a minimum of 2-3 months.  

 “Cairn is working collaboratively with the Government of India towards expediting the refund within the process of the Tax Amendment Act Rules. The previously announced special dividend is expected to be paid by early 2022,” Cairn added.

 The company plans to return shareholders up to $700 million through special dividend and buyback out of this subject to the resolution of the dispute. The remainder of the proceeds would be allocated to further expansion of the low cost, sustainable production base.

The government has collected Rs 8,000 odd crore from three of the 17 companies — Rs 7,900 crore from Cairn Energy, Rs 44.7 crore from Vodafone-Idea, and Rs 48 crore to WNS Capital — which it has proposed to refund under the new legislation if these companies fulfill certain conditions.

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