In a major setback, the Indian government lost arbitration to energy giant Cairn under the retrospective tax amendment to the law in a verdict that came Tuesday night. India has been asked to pay damages of Rs 8 billion to the British oil company. The verdict comes three months after India lost arbitration to Vodafone on the retrospective legislation.
The international arbitration tribunal has held that the Cairn tax issue is not a tax dispute but rather a tax-related investment dispute. Therefore, it falls under their jurisdiction. It has ruled that India’s claim in past taxes violated fair treatment under a bilateral investment protection pact.
The verdict has also pointed to the Edinburgh-based company’s arguments that the tax lawsuit arose after the Vodafone tax case, which was overturned by Indian courts.
The order has taken note of the arguments and statements of the leaders of the Bharatiya Janata Party, while in Opposition at the time on retrospective tax amendments and international disputes, with senior leaders like Arun Jaitley calling it ‘tax terrorism’.
Cairn had lost the case in the income tax appeal court (ITAT) and the matter is before the High Court on capital gains valuation and not the constitutionality of the tax claim.
The India tax lawsuit concerned the transfer of shares from Cairn India Holdings to Cairn India, as part of an internal reorganization of the group in 2006-07. This led to different interpretations as to whether the UK-based company made capital gains, prior to an initial public offering (IPO) of Cairn India shares. The IT department said Cairn UK made a capital gain of Rs 24,503.5 crore. Prior to the Cairn India IPO, Cairn Energy’s operations in India were owned by a company called Cairn India Holdings-Cayman Island and its subsidiaries. Cairn India Holdings was a wholly owned subsidiary of Cairn UK Holdings, in turn a wholly owned subsidiary of Cairn Energy.
At the time of the IPO, ownership of the India assets was transferred from Cairn UK Holdings to a new company, Cairn India. In 2006, Cairn India acquired the entire share capital of Cairn India Holdings from Cairn UK Holdings. In return, 69 percent of Cairn India’s shares were issued to Cairn UK Holdings. Therefore, Cairn Energy, through Cairn UK Holdings, had 69% in Cairn India.
Later, in 2011, Cairn Energy sold Cairn India to billionaire miner Anil Agarwal’s Vedanta group, barring a smaller 9.8% stake. He also wanted to sell the residual stake, but the IT department forbade him. The government also froze Cairn India’s dividend payment to Cairn Energy; It recently agreed to lift that freeze.
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