Explained: Cairn Energy-Indian Government Tax Dispute And Why Company Says It Is Freezing Indian Assets In Paris

Yesterday (8 July), Cairn Energy, a British oil and gas exploration and development company, claimed that it would be freezing at least 20 Indian properties in central Paris as per a French court order.

This is regarding the company's dispute with the Indian government over 2012 retrospective amendments to tax laws.

In December 2020, a three-member arbitral tribunal of the Permanent Court at The Hague delivered a 568-page unanimous verdict in the case.

It held that the Indian government was “in breach of the guarantee of fair and equitable treatment” which caused a loss to Cairn Energy. The court said that India's move was against the India-UK bilateral treaty and held India liable to pay Cairn $1.2 billion in compensation.

Yesterday, the company said that it had secured a French court order allowing it to freeze Indian properties in Paris. However, the Government of India denied all knowledge of the order.

“Government is trying to ascertain the facts, and whenever such an order is received, appropriate legal remedies will be taken, in consultation with its counsels, to protect the interests of India,” a Union Finance Ministry statement said, stressing that no notice, order or communication had been received by the government from any French court.

The Hindu report quoted a Cairn Energy spokesperson as saying that the ball was in India’s court to stop the enforcement proceedings of assets.

The Retrospective Taxation Case

The 2012 retrospective tax amendment brought by the Indian government stated that "an asset or a capital asset (share or interest) in a company registered outside India shall be deemed to be situated inside India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”.

Since the amendment applies retrospectively, it can be used to impose capital gains tax on pre-2012 transactions happening between different subsidiaries of the same company.

The government brought the amendment after Supreme Court of India, in 2012, ruled against the government in a similar case regrading Vodafone Group. The court had held that the series of transactions by Vodafone did not attract capital gains tax as the transaction did not amount to transfer of a capital asset within the purview of Section 2(14) of the Income Tax Act.

The amendment brought by the then United Progressive Alliance (UPA) government negated the judgement.

In 2006, Cairn Energy had made a bid to consolidate its Indian assets under a holding company — Cairn India Limited, and then divested its shares, most of them bought by mining conglomerate Vedanta Plc. However, Cairn UK was not allowed to transfer its 9.8 per cent stake in Cairn India to Vedanta. Tax authorities in India said in the 2006 transactions, the share transfers attracted capital gains tax of over Rs 6,000 crore by Cairn UK.

This retrospective taxation, Cairn argued, was in breach of the UK-India Bilateral Investment Treaty which had a standard clause that obligated India to treat investment from UK in a “fair and equitable manner”.

The matter reached the Permanent Court of Arbitration which ruled in favour of Cairn. India has challenged the arbitration award.

“Government has already filed an application on March 22, 2021 to set aside the December 2020 international arbitral award in The Hague Court of Appeal. Government of India will vigorously defend its case in Set Aside proceedings at The Hague,” the Finance Ministry said yesterday (8 July).

Issue Reaches New York Court

In May this year, Cairn Energy was suing Air India in New York to seize its assets to enforce the $1.2 billion arbitration. The company claimed that Air India is the “alter ego” of India, and therefore, it should be held jointly and severally responsible for India’s debts.

Cairn had also told the court that it had “initiated proceedings in numerous other locations around the world seeking recognition and enforcement of the award”, stating that other state-owned corporations could be targeted as well.

Last month, some foreign investors in Devas Multimedia filed a similar plea in the same court, seeking to declare Air India as the Indian government’s “alter ego”. They hope to recover a $160 million compensation awarded to the firm over its scrapped deal with Indian Space Research Organisation's (ISRO’s) commercial arm, Antrix Corporation.

The government has until next week to challenge the Cairn Energy plea in the New York court.

Amicable Settlement

However, both the Indian government and Cairn Energy said they were open to continuing talks over the issue.

“Our strong preference remains an agreed, amicable settlement with the Government of India to draw this matter to a close, and to that end we have submitted a detailed series of proposals to them since February this year,” the Cairn spokesman said.

“However, in the absence of such a settlement, Cairn must take all necessary legal actions to protect the interests of its international shareholders,” he added.

According to sources, the move was the “necessary preparatory step” to taking ownership of the properties and ensuring all proceeds from the sale of the properties would be accrued to Cairn Energy PLC as part of its efforts to enforce the award from The Hague in favour of Cairn.

The Paris properties referred to in the order by the Tribunal judiciaire de Paris are estimated to yield about $23 million to Cairn. The company has also identified assets worth about $70 billion in several jurisdictions that they could potentially attach through court orders.

Cairn lawyers have reportedly registered The Hague award in courts in at least 10 jurisdictions including the United States, the UK, Netherlands, Canada, France, Singapore, Japan, the UAE and even the Cayman Islands.